How will rising interest rates impact your home buying power?

If interest rates rise as muchIt has to sound very self serving when a real estate professional encourages homebuyers to buy now, before interest rates rise. Nevertheless, at this moment in time we are seeing a window of opportunity in Silicon Valley, and I am encouraging anyone who’ll listen that it’s time to get serious about purchasing.  Interest rates have been at historic lows for a very, very long time – and that is not going to hold much longer.  At the same time, we have seen a softening of home prices.  The only negative for home buyers is that there’s not much inventory.  This is true in many areas of the country, but especially in California, which is leading the recovery.

How important is it?  The buying power is drastically improved by lower rates, and will be adversely impacted just as dramatically when the rates rise.  Today I spent quite awhile calculating out what happens to payments as interest rates go up, and did so in quarter point increments.  For this example, I used $400,000 since that’s a conforming loan that a lot of first time home buyers might seek, but you can extrapolate and understand what happens to a loan of $1 million or more just as easily. Please have a look:

30 year fixed rate payments with various interest rates

Historically, interest rates are usually closer to 7 or 8%.   (more…)