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Interest Rates Go Up, How Much Home You Can Afford Is Going Down

Real Estate news source Inman recently ran a story about the effect of our gradually increasing interest rates on home affordability.

According to Inman, they are around 4.83% this year and projected to increase by around 1% to 5.38% in 2019. For reference, in 2017, interest rates were around 4.25%.

These increases don’t seem like a lot but those little numbers add up quickly and what SEEMS like a small rise can translate into more dollars to pay interest and less for the principle. This translates into having to purchase less home in order to stay in budget.

The Inman article gave an example using a home with a $250,000 purchase price. With an interest rate of 4.83%, the monthly payment for principle and interest would be $1,053. The total annual payments would be $12,636 and the total interest paid over the 30 year mortgage term would be $179,066. Just one percent increase in that interest would mean a $1,177 monthly payment, $14,127 total annual payments and a whopping $223,839 in interest paid after 30 years!

This isn’t the end of the story though. The annual income required for $1,053 is $45,129 and for the $1,177 payment it is a significantly larger $50,443. In other words, a 1% increase in interest means the borrower would either have to have an additional $5,314 in income or would have to look for a less expensive home.

If you are looking for a new home or even thinking about it, please remember that interest rates are going up and that increase will directly affect how much home you can afford. Rates are still low but we will soon see the end of the below 5% level. Make the most of your money NOW if a new home is in your future!




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