Rising interest rates can drastically reduce the max purchase price you qualify for. Depending on the loan amount, a rise in rates of just .25% can potentially cost you hundreds of dollars (in particular with the high loan amounts in our Bay Area). But even with average loan amounts, coupled with the goal to buy at your maximum ability, you need to watch interest rates and how their increase will affect your housing search.
Case in point: I am getting a client preapproved right now, but she needs to prepare her current home for putting it on the market and selling it. It may be awhile until her home is sold and she is ready to purchase her new one. She is anxious to purchase before rates rise even more, so she asked me to qualify her at both current rates and a higher rate, just to see how it changes her purchasing power. I always recommend getting qualified at a higher rate due to unforeseen market changes, and to err conservatively, but this is still a good exercise.
She anticipates having $200,000 in cash proceeds from the sale of her home, which she will use as down payment. Her annual gross income is $103k, and she has zero debt, so all we need to account for in her qualifying ratio is the housing payment (mortgage, property taxes & homeowners insurance).
If she were to go into contract today, I could lock in a 30 Year Fixed interest rate with no points and no prepayment penalty at 4.5% (4.541% APR).
At this interest rate, and with her $200k down payment, the maximum she can qualify for is a $780k purchase price. If interest rates increase by a half a percent to 5.0% (a huge, if not assured, possibility in this year), then it will reduce her max qualifying price to $750k max. So for her case, a half a percent increase in rate translates to a reduction of $30k in her purchasing power.
If she were able to qualify at the same purchase price of $780k with both a 4.5% and a 5.0% interest rate, that monthly payment difference is $174.80. That’s nearly $200 more in monthly payment at the $580k loan amount for a half a percent increase in interest rate. There isn’t much that can be done with market fluctuations and an increase in rates, but it is important to be prepared and to be conservative in the home price range you are looking in, and to anticipate increases like this. Make sure you discuss this with your mortgage professional, and ask them up to what interest rate you are preapproved.
If you are looking to get preapproved or to understand what your monthly payment may look like on a home purchase, I am here to help.
