“How much money can I get to buy a home?” It’s a common question that often leads off a buyer’s conversation with me.

What they’re really trying to learn is, “In what price range should I be shopping?” The answer to this question provides a target for the buyer to do their search, and a cap for their REALTOR® to not exceed.

However, it’s not so much the purchase price that makes the largest difference, but instead the interest rate. Take a look at the chart on the right. Just a 1% rise in interest rates reduces a buyer’s purchasing power by 10.76%.

And, interest rates are much more volatile than home prices. We have seen interest rates move both up and down as much as 1/2 of a percentage point in one day – it usually takes many weeks or months for home prices to move that much.

Also, note that when home prices are falling, the buyer has much more leverage than when home prices are increasing. This gives you much more buying power as I outlined in my prior post.

So, when will rates start to rise? Let’s answer this in reverse – how low will rates go? Currently, investors are now buying T-bills at below 2.0%. Inflation is also at 2.0%. That means investors are just trying to get their money back, rather than get a return on their money. This won’t last long, and investors will start to demand a higher return on their money, pushing home mortgage rates back up.

Knowing how much home you can afford is an important first step. Knowing that your affordability is at risk with just a small increase in interest rates is probably the most powerful tool you have by your side.

Contact me today to learn how much you can afford now and when interest rates rise later.