A buyer tends to focus on the total sale price, but another way to look at it is by what it will cost you each month. When you pay rent to a landlord, your rent can potentially go up as often as the landlord wants it to depending on your lease. On the other hand, most home buyers are getting a fixed-rate mortgage. The bank loans you the total price of the home and charges interest, but that interest rate is often a “fixed rate” which means the principle and the interest payment on that loan will stay the same over the entire mortgage term – often 30 years.
When you get a mortgage, it’s the interest rate that determines what you’ll pay every month. Higher property taxes or insurance can increase the payment in the future, but the payment on the loan will always stay the same in a fixed rate loan. However, if the interest rate goes up, even just 1%, that will negatively affect how much you can borrow. A good rule is that a 1% increase in interest rates will equal 10% less you are able to borrow but still keep your same monthly payment. It’s said that when interest rates climb, every 1% increase in rate will decrease your buying power by 10%. The higher the interest rate, the higher your monthly payment.
The good news is that rates today are less than half of what they were a generation ago, which means it’s still a good time to buy!