You hear it all the time, “Interest Rates Will Go Up and This Will Affect Your Ability To Buy a Home” or “Buy Now, While Rates Are Low”, and you wonder, why are agents making such a big deal about interest rates? It’s because it affects, in a very simple way, your ability to afford something in your new home. Let’s examine this phenomenon in a real world way.
Jack and Jill would like to buy a home in Loudoun County, Virginia. As a successful couple in their late 20’s, who graduated with bachelors degrees and found good jobs right out of school, they are making $130,000/year combined and have recently gotten married. Their families have agreed to help them out with a down payment, so they have about $20K to put down on their dream home. At today’s interest rate of 3.65% for a 30 year loan, they are able to qualify for a purchase price of $582,687 (assuming monthly debts of ONLY $250, which means no car payments, etc).
Now, lets assume that the Federal Reserve decides to begin raising the overnight lending rate for banks by a quarter point which then drives the mortgage interest market by a quarter of a percentage point. This move typically will be reflected in the mortgage market relatively quickly, so that 3.65% becomes 3.90%. Now, Jack and Jill can only qualify for $570,371, which is $12,316 less than before.
This could be the value of a finished basement, or an upgraded kitchen, or a nice home media room. In this way, the interest rate change becomes meaningful.
More important to note, is that almost NO ONE has monthly debts of only $250, with student loans, car payments and other debts to consider, so it becomes harder to qualify for the maximum, especially in Loudoun County. And, as someone who used to have some of the best paid workers in the economy working for me (e.g. software developers), I know how hard it is to find a job that pays the kind of money that I am talking about, and no one wants to be “house- poor” because you are buying something at the very top of what you can afford.
So, the next time that you see an agent like myself talking about interest rates, pay attention. When it comes to buying a house, paying attention can be the difference between that nice fully featured single family home and a stripped down condominium that is not much better than the apartment that you are renting today.
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