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Home > Home Buying > How Interest Rates Affect Your Home Buying Power

How Interest Rates Affect Your Home Buying Power

May 24, 2022 By Connie Dolansky

Home Buying Power

With the recent increase in interest rates, the home purchase price you can afford may have decreased. A higher interest rate means your mortgage is more expensive because you spend more money on interest over the life of your loan. If you were pre-approved for a loan before interest rates significantly increased, you now have less buying power and may need to lower the price range when home shopping.

There are different loan structure options to consider to reduce monthly payments. Buying mortgage points or using an adjustable-rate mortgage may make financial sense depending on the amount of the loan and the length of time you expect to live in the home.

Mortgage Points

Mortgage points are a way to pay a cost upfront to lower your interest rate and reduce your monthly mortgage payment. Each point costs one percent of the total loan amount. Buying points makes the most sense if you plan to be in your home long-term because the amount you save each month on your mortgage will make the upfront cost of buying points worth it. You can calculate the breakeven point you need to stay in the home to recoup the upfront cost of buying points and then decide if it is a good financial decision.

Adjustable-Rate Mortgage

Unlike a fixed-rate mortgage where the interest rate is the same throughout the life of a loan, an adjustable-rate mortgage has an interest rate that adjusts over time based on the market. The initial interest rate on an adjustable-rate mortgage is set below the current interest rate on a comparable fixed-rate mortgage. There is a period of time that this rate is constant depending on the terms of the loan. After the initial term, the loan resets with a new interest rate based on the market at the time it resets. An adjustable-rate mortgage is typically less expensive than a fixed-rate mortgage during the first term. However, depending on market conditions, the interest rate may be higher or lower at the time of the rate reset on the loan so you’ll want to weigh the pros and cons of this type of loan.

Interest rates are still historically low and although they have gone up recently, it doesn’t mean it isn’t still a good time to buy a home.

Filed Under: Home Buying

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