Well… first it means that interest rates will increase… second it means that you will loose affordability, and third it means that we will start to see inflation set in which will discuss in later posts.

Lets keep it simple. If you purchase a home today at a 5% interest rate fixed for 30 years, and you were to finance $400,000.00 your principle and interest payment would be about $2150.00/month. If interest rates go up just 1% and you were to finance the same amount your payment at 6% would go up to $2398.00/month which is a difference of $248/month, and if they go up a conservative 2% your payment at 7% would be about $2661.00.month or again a difference of $511.00/month.

From an affordability stand point that means you will be paying $6.65/thousand dollars financed (at 7%), as compared to $5.37/thousand dollars financed (at 5%). Now would you pay 7% today? of course not… but in a few months… this may be a great rate.

What happens when you take into consideration the ability to qualify for the two different payments? For a payment of $2150.00/month you would need to make approx. $5,657/gross/month and for a payment of $2661.00/month you would need to make approx. $7,002.63 gross/month. What this means is you will need to make $1,345.63 per month to afford the exact same mortgage or buy a home that is about $77,000.00 less!

While these numbers might not be exact… the fact is that a small difference in interest rates will have a dramatic affect on how much home you can afford. The only question now is… what happens when you look back at this time in the market, and realized that now really might have been a good time to purchase a home? Will you ask this question from the comfort of your home, or from the outside looking in?

Let me know your thoughts.

This scenario takes into consideration only principle and interest, using a 38% factor for calculation and illustration purposes only. Please consult your mortgage consultant or call me for a referral to a trusted professional for further information.