Dated: 01/15/2015

Views: 612

Image title

As mortgage rates rise, the interest portion of monthly payments on new mortgages increases. The result is a reduction in the portion of each payment which goes toward amortizing the mortgage principal. Thus, the maximum price a homebuyer can pay (their purchasing power) declines with rising mortgage rates.

The opposite is true of falling mortgage rates. When mortgage rates decline, buyer purchasing power increases. The past 30 years was a period of declining mortgage rates, which brought about increased borrowing capacity without the need for an increase in pay. 

Further, little adjustments in mortgage rates significantly affect buyer purchasing power. Consider an average homebuyer whose gross annual income is $60,190. This allows them to make monthly payments (at 31% of their gross income) of $1,555.

The $1,555 monthly payment qualifies them for the following mortgage amounts on a 30-year fixed-rate mortgage (FRM) at different rates:

Mortgage rateMortgage amount

If the mortgage rate fluctuates by so much as half a percentage point, the mortgage amount changes by tens of thousands of dollars. As a result, when mortgage rates rise, a homebuyer’s income qualifies them for less principal, causing them to become disenchanted and exit the market. Their only other option is to settle for less house than they were able to qualify for at the old mortgage rate, as sellers are slow to drop their price expectations when mortgage rates rise.

Blog author image

Arna Freedman CA BRE#00925320

Real Estate Services You will love! We make the process for you. Your transaction will go smoothly, you can rest knowing that you're interests will be represented and will yield you the best price pos....

Want to Advertise on this Site?

Latest Blog Posts


 Upcoming Changes for Some Home Buyers & Homeowners       Under the new tax law, homeowners will have decisions to make in 2018,

Read More

Price Reductions On Aliso Viejo Homes For Sale

If you're trying to find a good deal in Aliso Viejo you might want to focus on the homes that have price reductions?This might be of help when looking for a deal in today's market. Aliso

Read More

New Home Buyer Options For High Prices

Multigenerational homes are coming back in a big way! In the 1950s, about 21%, or 32.2 million Americans shared a roof with their grown children or parents. According to an article by 

Read More

Would You Like Down Payment Assistance

Would You Like Down Payment Assistance?  Almost Free Money to Buy A Home?My Lender Team and I can help you get into your home by the Holidays! How exciting would that be?Al will help you

Read More