If you’re planning to buy a home, it’s critical to understand the relationship between mortgage rates and your purchasing power. Purchasing power is the amount of home you can afford within your financial reach. Mortgage rates directly impact your monthly payment on the home you are buying.
So, when rates rise, does the monthly payment you can lock in on your home loan? In a rising-rate environment like we’re in today, that could limit your future purchasing power.
Today, the average 30-year fixed mortgage rate is above 5%, and in the near term, experts say that’ll likely go up in the months ahead. You can get ahead of that increase if you buy now before that impacts your purchasing power.
Mortgage Rates Play a Large Role in Your Home Search
The chart below can help you understand the general relationship between mortgage rates and a typical monthly mortgage payment within a range of loan amounts. Let’s say your budget allows for a monthly mortgage payment in the $2,100-$2,200 range. The green in the chart indicates a payment within that range, while the red is a payment that exceeds it (see chart below):
As the chart shows, you’re more likely to exceed your target payment range as mortgage rates increase unless you pursue a lower home loan amount.
If you’re ready to buy a home in Chicago, Illinois, use this as your motivation to purchase now to get ahead of rising rates before deciding to decrease what you borrow to stay comfortably within your budget.
Work with Trusted Advisors To Know Your Budget and Make a Plan
It’s critical to keep your budget in your mind as you search for a home. Danielle Hale, Chief Economist at realtor.com, puts it best, advising that buyers should:
“Get preapproved with where rates are today, but also consider what would happen if rates were to go up, say another quarter of a point, . . . Know what that would do to your monthly costs and how comfortable you are with that, so that if rates do move higher, you already know how you need to adjust in response.”
No matter what, the best strategy is to work with your real estate advisor and a trusted lender to create a plan that considers rising mortgage rates. Together, you can look at your budget based on where rates are today and craft a strategy so you’re ready to adjust as rates change.
Bottom Line
Even small increases in mortgage rates can impact your purchasing power. If you’re in the process of buying a home in the Chicagoland area and surrounding suburbs, it’s more important than ever to have a strong plan.
Let’s connect so you have a trusted real estate advisor and a lender on your side who can help you strategize to achieve your dream of homeownership this season.
