Tuesday, June 2, 2009

How Interest Rates Affect Your Purchasing Power

Understandably, folks are focused on falling housing prices this year. What often gets lost in the shuffle is how changing interest rates affect a home buyer’s purchasing power.

Higher interest rates will often kill your buying power faster than falling prices, so it pays to pay attention.

Rates are currently at historic lows, but expected to rise in the near to mid-term future.

During the week ending May 29, 2009, the average 30-year fixed rate jumped more than 1/2 a point to 5.5 percent. (see original quote on, May 29).

Just what does a half-point do to your buying plans? If you’re trying to keep your payments at about $900 a month, a 1/2 point interest rate increase means you must start shopping housing priced nearly $10,000 less.

Check out this chart for more price points (click to enlarge, "back" to return)

 Rising Interest Rates Lowers Purchasing Power (click to enlarge, use browser’s back button to return)

Housing prices didn’t drop $10,000 last week – even in Phoenix. See how rates can affect your buying plans faster than prices?

You can drive yourself crazy by watching rates obsessively. Life is short, it’s not worth obsessing over rates. But it does pay to keep an eye on them. One of my favorite local lenders posts rates to his website daily.

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