How will changing interest rates affect homebuyers?
Do fluctuations in rates have a big impact on homebuyers? Here’s the scoop on rates, affordability – and why now is the time to buy.
How affordability is affected by changing rates
As interest rates increase, the buying power of a borrower is lessened. Let’s say a homebuyer has $1,200 to spend on their monthly mortgage payment. If rates are 4 percent and the borrower secures a 30-year fixed conforming loan, their loan could total around $250,000. The monthly mortgage payment in these conditions would be $1,194.
Now let’s say rates rise 1 percentage point to 5 percent. With all the mortgage terms remaining equal, the borrower would pay $1,208 monthly for a loan totaling $225,000. That’s a difference of $25,000, or 10 percent, in buying power.
Many first-time buyers do not have a large down payment, and government and private lenders have changed their standards in order to accommodate these high earners with minimal savings. FHA loans can now be secured for as little as 3.5 percent down, while conventional (private) loans have a minimum of 3 percent down.
While these newer minimums have prompted many first-time buyers to enter the market, it also means these buyers are relying heavily on financing. And if rates increase slightly, they may need to look at adjusting their home buying budget a little.
The silver lining
The reality is that our local market is still a great place to buy! Since the election last fall, mortgage rates have risen slightly…but remain historically low. During the last economic expansion from 2001-2007, mortgage rates hovered between 5% – 7%. And in the 1990’s, rates were even higher, skirting between 7% – 9%. Even with a slight uptick in rates over the past few months, it’s a great time to buy a home in Lexington and Central Kentucky!