What a 1% Increase in Mortgage Interest Rates Really Means to Your Buying Power

What does a 1% increase in mortgage interest rates mean to you as a buyer? 

Ryan Haley, broker and owner of Atlantic Shores Sotheby’s International Realty, explains the significance of even a small rise in interest rates. 

A 1-percent rise in mortgage interest rates actually affects 10% of your purchase power. This is one reason why you might not want to wait too long to make your purchase in 2022. 

Will Interest Rates Increase?

For months now, experts have been predicting that interest rates will rise as we move to 2022. To what level that increase would be is not definite. But many of the experts are saying that the increase would be in the 4-percent range. In the second-home market, we project that possibly being higher. 

For example, if you are looking for a $400,000 property, and you have talked to your loan officer about the amount of money you’d be comfortable to pay every month as well as the downpayment you’d be willing to pay. 

If interest rates go up 1%, and you still want to keep your downpayment as well as your monthly payment at that same level, your buying power will go down by 10%. This means that what you are looking for in the $400,000 range will then equal $360,000. Keep in mind that many people are not even finding the right property at $400,000. 

Another thing that can be worrying is that experts are predicting that prices are going to go up in 2022. The lower estimates for price appreciation are in the 3% range and the higher estimates are about 14% in the next year. 

With interest rates and prices going up, it may become harder for many people to make their purchase if they continue to wait. It will best to get ahead and continue to look and be ready today when that right property comes. Also, be ready with your negotiation strategy, so you can ultimately win. 

We are not seeing demands go down. In some cases, we are seeing five to 15 offers on the best properties. Since demand is still very high, you will have to make an offer that is as clean as possible to be able to secure the home you want. 

What Is Influencing the Market?

What is driving market trends, and won’t interest rates slow down the market?

A lot of the buyer activities have been fueled by low interest rates. But the other piece that could be equally as important is the millennial buyer. 

The millennials are moving right into their prime buying age. This is something that’s predicted to continue in the next two to three years. These buyers coming into their prime buying age are keeping the demand at a high level. At the same time, inventory is still relatively low, and this will continue to push the prices up. 

Bottom Line

A one-percent increase in Interest rates will decrease your buying power by 10%. But keep in mind that this increase will not happen overnight. Most likely, this increase to 4% to 4.5% is going to happen in phases over the course of the next year. Thus, as a buyer, you still have some time, but you have to act quickly to take advantage of the combination of lower prices and lower interest rates that we have now. 

If you have any questions regarding this topic or anything related to real estate, please give us a call, and we will be happy to assist.