With interest rates hovering around 5% all season, now is a great time to remind buyers that not only is 5% a historically low interest rate, but that it won’t be around forever.
Buyers sitting undecided about buying a home today because they believe home prices may continue to go down should give equal consideration to their interest rate. It is critical for buyers to keep in mind how their interest rate affects affordability – that is, what price range they can afford to buy in.
The lower the interest rate, the more home a buyer can afford:
5% = $266,000 purchase price
5.5% = $253,000 purchase price
6% = $241,000 purchase price
6.5% = $230,000 purchase price
7% = $220,000 purchase price
Example Buyer is interested in purchasing a $260,000 home today at 5%. Buyer delays making a purchase decision to see if home prices will drop more. However, in this market at this price range, prices are slightly increasing – multiple offers are now commonplace for affordable homes in the $200s.
Weeks pass and now interest rates are in the mid 6s. Buyer can no longer afford to buy this home - at 6.5%, buyer can afford up to $230,000 - the house they love is now out of their reach.
This calculation assumes $100,000 annual household income and 3.5% cash down.
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