1% Matters - How Mortgage Rates Impact Your Buying Power

A history on mortgage interest rates and what it means to your purchasing power.

You have decided it is the right time to purchase your first home, or maybe it is time to get a new home.  Thousands of people make this decision every day.  The first step begins with your lender, and the pre-approval process unless you are paying cash.  When getting a mortgage, the price you quality for is directly related to the current mortgage interest rate you can lock.  Obviously, this impacts you when you are selling as well.  Low interest rates increase purchasing power.

Imagine getting a pre-approval letter saying that you have been approved for a home with a 30 year mortgage with fixed interest rate of 13.7 percent? Believe it or not, those were the average mortgage interest rates experienced in the US in the 1980s for 30 year mortgages. Interest Rates in the last four years have been the lowest we have experienced in over a century. The all-time low historical rate for a 30 year fixed mortgage was in 2012 at an average of 3.7 percent. That is an astonishing 10 percent drop from the average rate seen in the 1980s. The second lowest average rate was in 2013 at 4 percent. So far in 2014, the average rate is at 4.4 percent for the months of January, February and beginning of March. The graph below illustrates the fact that the last time we experienced rates close to the ones we have today was in the 1950s, after World War II. Even then according to the National Bureau of Economic Research, the average rate on a 30-year, fixed-rate, FHA-insured mortgage was 5.15 percent as of December 1956. That was the only point in time when rates even came anywhere near the rates being seen today.

Information courtesy of Dr. Steve Sjuggerud & Federal Reserve Bank of St. Louis

How would you like your buying power going from $300,000 to $267,000 based on an interest rate change of just 1 percent? According to Dan Green, of The Mortgage Reports, he states that a 1 percent change in mortgage rates means a significant change in what you can afford. With a 1 percent change in interest it will mean a 10.75 percent change in affordability for the home buyer. This change in affordability will be seen across the board at any price range and will affect anyone looking to buy. For instance, if you are seeking to purchase a $200,000 home, the 1 percent change in interest rate would lower your purchasing power to $178.500. These examples of the decline in purchasing power are dramatic, and our examples only reflect a 1 percent change.  Can you imagine the effect of a 3 or 4 percent change in interest rates?  It is important to note, that although the Federal Reserve has held interest rates fairly constant over the past few years, interest rates are unpredictable and change on a daily basis.

The chart below provides examples of 30 year fixed rate mortgages and the effects of increasing rates on purchase prices of $300,000 and $267,000.

What is the take away from this article?  With regard to your personal purchasing power, right now is a very advantageous time to purchase a home.

Authored by: Cynthia Cure & Bill Barkley, Broker

Additional Sources: bankrate.com