The Impact of Rising Rates On Affordability

interest rates

Don’t be left up in the air if rates rise.

Since the election, mortgage interest rates have gone up 3/4 of a point.  It is impossible to know where they will be 6 months from now but there is certainly more pressure on the upside than the downside.  So how much does a mortgage increase when rates rise?  And how much more income is required to buy a home?

The 2nd question may be more important than the first.  There have been buyers who started looking in a lower interest rate environment and now can not afford the neighborhoods they initially targeted.

It is not just what a buyer qualifies for, it also matters where they feel comfortable from a budget perspective.  Many, many buyers I work with are qualified for a much larger mortgage than the one they secure but they know there are other things they want to do with their life and don’t want to be house poor.  Rising interests rates impact those folks as well.  Some will look in lower price ranges while others will delay the purchase until they have a larger down payment. (The second option – delaying – can be a dangerous game.  If rates continue to rise it is really hard to get ahead of the curve absent extraordinary circumstances like an inheritance or huge salary increase.)

The chart below shows the impact of rising rates.  Before getting to the chart, though, let me give you an overview of my basic assumptions.

I assume that the principal and interest (PI) portion of the mortgage should be no more than 30% of a buyer’s monthly gross income.  Lenders will allow total debts up 40% to 42% of monthly gross income but for the chart below I kept the number at 30% assuming a typical buyer may have a car loan and/or a student loan along with other debts.  And the calculations below do not include insurance, taxes and any HOA or condo fee which are also part of the 42%.


Interest Rate
$200,000
Mon. PI /
Annual Inc. Req
$300,000
Mon. PI /
Annual Inc. Req
$400,000
Mon. PI /
Annual Inc. Req
$500,000
Mon. PI /
Annual Inc. Req
3.5$898 = $35,924$1347 = $53,885$1796 = $71,847$2245 = $89,809
4$955 = $38,193$1432 = $57,290$1910 = $76,386$2387 = $95,483
4.5$1013 = $40,535$1520 = $60,802$2027 = $81,070$2533 = $101,337
5$1074 = $42,946$1610 = $64,419$2147 = $85,891$2684 = $107,364
5.5$1136 = $45,423$1136 = $45,423$2271 = $90,846$2839 =$113,558

It is easy to see the dramatic impact rising rates can have on payments and affordability.  Given the current climate, I think if you were planning a move in 2017 and the timing is flexible, sooner is better than later.

 

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