How Interest Rates Impact Your Mortgage Affordability

Interest rates are the lever that controls the housing market. They determine not just how much you pay back, but how much you can borrow in the first place. Understanding this relationship is critical for timing your purchase and choosing the right loan.

The Power of 1%

It’s easy to dismiss a rate hike from 4% to 5% as small. It’s "only" 1%, right? Wrong.

On a $500,000 loan over 30 years:

• At 4%: Monthly Principal & Interest is approx. $2,387. Total Interest: $359,000.
• At 5%: Monthly Principal & Interest is approx. $2,684. Total Interest: $466,000.

That 1% increase raises your monthly payment by almost $300 and costs you over $100,000 extra over the life of the loan.

Buying Power Reduction

Most people buy based on the monthly payment they can afford. When rates rise, your purchasing power falls.

If your budget allows for a $2,500 monthly mortgage payment:

• At 3% interest, you can afford a loan of roughly $590,000.
• At 7% interest, you can afford a loan of roughly $375,000.

Rates literally shrink the house you can buy.

How to Secure a Better Rate

1. Improve Your Credit Score: Lenders reserve the best rates for borrowers with scores above 760.
2. Larger Down Payment: More "skin in the game" lowers the lender's risk.
3. Shop Around: Different lenders have different overheads and appetites for risk. Getting quotes from 3-5 lenders can save you huge amounts.
4. Buy Points: You can pay an upfront fee ("points") to permanently lower the interest rate on your loan.

Conclusion

While you can't control the Federal Reserve, you can control your financial profile. Use mortgage calculators to stress-test your budget at different interest rates so you aren't caught off guard by market fluctuations.