Mortgage Daily

Published On: December 16, 2022

The Impact of Lower Interest Rates on Your Purchasing Power

The Amount of Your Mortgage Loan Is Only the Beginning

When looking for a mortgage, interest rates are of utmost importance.

This is because mortgage rates impact more than simply the interest you’ll pay throughout the life of the loan.

Your fixed rate also significantly impacts determining your “home purchasing power,” or the amount you can purchase.

In recent months, mortgage rates have approached historic lows. This indicates that a more significant number of prospective homebuyers can afford a more expensive property than they initially believed.

Curious about how much you might afford with today’s low loan rates? Check tailored interest rates and your pre-approval pricing.

How Current Mortgage Rates Impact Purchasing Power

In August and September of this year, mortgage rates fell, approaching all-time lows.

Try out our Purchasing Power Calculator

The lowest rate on a 30-year fixed-rate mortgage in September was 3.5%. It could afford a property worth more than $400,000 with a monthly payment of around $1,500. (not including taxes, insurance, or HOA fees).

A year ago, when interest rates were over 4.6%, the same monthly payment might have purchased a home for less than $375,000

Your purchasing power might improve or decrease with every 0.125% fluctuation in mortgage rates.

With every 0.125% change in mortgage rates, your purchasing power might either increase or decrease.

Since last year, there has been a considerable decline in interest rates. In addition, home affordability increased for the first time since 2016 this summer.

If you have been on the fence about acquiring a property, you should move quickly. You may discover that you can afford a larger, nicer home than you first believed while still making affordable monthly payments.

A 1% Reduction in Interest Rates Might Add $30,000 to Your Budget

It is common knowledge that lower mortgage rates result in a reduced monthly payment.

“A 1% point reduction in rates, such as from 4.5% to 3.5%, results in a $167 monthly savings on a $200,000 mortgage,” according to Lawrence Yun, chief economist of the National Association of Realtors.

To demonstrate this point, consider the following illustration.

Steve has a monthly gross income of $5,000 and an estimated total debt of $2,250. His ratio of debt to income is 45%.

Steve obtains a $250,000 30-year fixed loan. At 4% interest, his principal, interest, taxes, and insurance (PITI) payment would be $1,193 per month.

However, his real rate was 3.5%.

“A half-percent drop in the interest rate improves Steve’s purchasing power by $15,000, assuming his maximum monthly payment is $1,122,” explains Brian Koss.

If Steve’s interest rate were 3%, his monthly payment would be a remarkable $1,051.

“This increases his purchasing power by $30,000,” Koss notes.

Why Rates on Mortgages Are So Low

The president of Eave/Home Loans at HomeLight, Saro Vasudevan, explains why mortgage rates fell during the year.

“The yields on U.S. Treasury notes determine mortgage rates.” For instance, 30-year fixed mortgage rates track the yield on 10-year Treasury notes,” he explains. And rates on U.S. treasuries have an inverse association with the growing prices of U.S. Treasury bonds during the last nine to twelve months.

In addition, there have been rising concerns about the status of the global economy, excluding the United States.

“According to global analysts, yields and mortgage rates will continue to decline. Even in the United States, an economic adjustment is anticipated in the near future, said Vasudevan.

Indeed, interest rates have been falling over the world. According to Koss, mortgage rates are moving in synchrony. Furthermore, the economy is decelerating due to tariffs and other causes. Consequently, our interest climate is decreasing.”

The Federal Reserve’s shifting policy stances have also affected the U.S. interest climate.

“Rather than hinting at another rate hike in the coming months, the Fed suggested a halt to rate hikes,” Yun observes. In reality, the Fed just announced a 0.25 percent reduction in interest rates.

According to Yun, the Fed’s shift in stance alone has significantly decreased mortgage rates.

The Lesson

“Mortgage rates significantly impact the needed monthly payment for a buyer,” adds Vasudevan.

Early in a typical 30-year mortgage, more than 95% of a buyer’s monthly payment is applied to interest. The lower the mortgage interest rate, the less interest must be paid. And the smaller the monthly payment, the more month-to-monthly affordable the property.”

“The lower the interest rate, the lower the mortgage rate. The lower the interest rate, the cheaper the monthly mortgage payment.” President of Eave/Home Loans at HomeLight, Saro Vasudevan

If you can afford a specific monthly mortgage payment based on your salary, you can qualify for a larger mortgage if interest rates are lower.

Will Mortgage Rates Continue to Decline?

Should you wait for interest rates to fall more, increasing your purchasing power? Or should you lock in the price now and buy sooner?

“There is little possibility that mortgage rates will fall significantly. The bond market has already priced in another Fed rate drop before the end of the year,” explains Yun. Current mortgage rates are around 3.5 percent. This is quite favorable and close to a generational low.”

Your Next Steps

Yun’s advice? If you can afford to acquire anything today and it makes sense, you should go for it.

Rates can climb and decrease on the flip of a dime, so it is prudent to lock in when you receive a competitive offer.

Koss advises, “If rates decrease to a level that makes sense for your position, execute promptly and don’t look back.”

 

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