Interest Rates Affect Affordability the Most

Now that the heated market is softening, many buyers seem to be waiting on the sidelines for the once high prices to decline even more. Their reasoning is that a lower price will ease the road to homeownership. Currently, prices have decrease and seem to be stabilizing. But, the true factor that affects affordability is interest rates, which is the most powerful component of the home-buying process.

A drop in interest rates has a far greater affect on monthly mortgage payments than a drop in home prices. So, if home prices do happen to drop and if interest rates rise at the same time, that once affordable home will quickly become unaffordable.

For example, a household with an annual income of $100,000 can afford a $450,000 home at an interest rate of 5.63%. With an increased interest rate of 6.7% (approximately 1% higher), that same family can only afford a home priced at about $399,411. The only factor that changed in this equation was the interest rate. This change in interest rate resulted in a $50,000 decrease in affordability. The mortgage industry is currently predicting mortgage rates to rise by year’s end.

For those thinking of buying, look at all of your options and run the numbers with a mortgage professional. If interest rates are slowly ticking up as you wait for home prices to drop, you might unknowingly price yourself out of the market. Even worse, home prices may stay the same or increase, while interest rates increase. This will price you out even quicker. The more inventory available in your market, the more bargaining power you have. Instead of waiting for prices to drop, make an offer that is equal to your reasonable target price. Smart sellers are willing to negotiate, so you may be able to acquire that lower price by just asking for it.

Buyers are currently making great real estate purchases in this market. So make an offer, the worst that can happen is a counteroffer or rejection. But you won’t know until you try.

You can also lock in early to guarantee you a lower interest rate while you shop for a home. Locking in will preserve your lower interest rate and most mortgage programs allow you to lock in for up to 4 months.

A few ticks in mortgage interest rates can translate in an increase in mortgage of hundreds of dollars, so make a smart plan and execute.