For most homebuyers, the most important number to consider when buying a home isn’t the overall list price of the home, it’s the home’s total monthly cost, including the mortgage payment, property taxes, and the cost of homeowners insurance. As you budget for a home, this monthly rate is critical, and ultimately determines the amount you’ll be able to borrow. One of the most important factors determining a buyer’s mortgage payment is the interest rate charged for the loan. Because most mortgages last for 15 or 30 years, this rate can have a surprising impact on your purchasing power.
How Do Interest Rates Affect Purchasing Power?
In a fixed-rate loan, the interest portion of the loan is amortized over the life of the loan, meaning that each payment is the same amount, and includes an amount for both principal and interest. A higher interest rate, then, results in a higher monthly payment over the entire life of the loan.
However, inflation is only one factor that potential buyers should consider before embarking on a home buying journey. Rising interest rates, a reaction to high inflation, can have an outsized effect on homebuyer “purchasing power” — that is, the value of the home you can buy with each dollar you have to invest. Understanding how rising rates affect purchasing power, and what you can do to maximize your investment dollar, is an important consideration for homebuyers.