Mortgage rates play a crucial role in the purchasing power of aspiring homeowners. Understanding how exactly mortgage rates factor into buying a home is an important part of determining your budget.
What is Purchasing Power?
Purchase power is the financial capacity of individuals to buy goods and services. Related to real estate, this translates to the ability to purchase a home. It is impacted by various economic factors including income, employment stability, inflation rates, and 10 year treasury to name just a few. Mortgage rates represent the cost of borrowing money to finance a home purchase. Lenders base their available rates off of the going federal rates and offer many different types of mortgages from there.
As interest rates rise, purchasing power falls. It’s calculated to be approximately 10.75% less for every one percent more interest. When interest rates are higher, it demands additional funds be reallocated to pay the interest amount rather than the borrowing amount.
Looking back over the last few years, mortgage rates hit a record low in the summer of 2021 with just 2% for a 15-year mortgage and just under 3% for a 30-year. Since then, and more specifically the beginning of 2022, rates rose to an apex of 7% (15-year) and 7.75% (30-year). However, the rates dropped approximately 1% in the last two months of 2023.
Interest Rates and Purchase Power
When interest rates are low, borrowing costs decrease, increasing the purchasing power of potential buyers. Conversely, when interest rates are higher, this can limit affordability, reducing the pool of qualified buyers.
The intersection of purchasing power and mortgage rates is what frames a home buying budget. Navigating this intricate landscape and considering both financial capacity and the bigger lending environment can be tricky. In this path to homeownership, let us help guide the way! Contact The Durango Team at The Wells Group for more information about purchase power and current mortgage rates.