How Interest Rates Affect Your Buying Power

Interest rates are the single biggest factor determining your monthly mortgage payment. Even a small increase in rates can significantly reduce your buying power—the maximum home price you can afford.

The Math of Buying Power

Let's assume you can afford a monthly principal and interest payment of $2,000.

• At 4% Interest: You can afford a loan of roughly $419,000.
• At 5% Interest: Your buying power drops to $372,000.
• At 6% Interest: It drops further to $333,000.
• At 7% Interest: It plummets to $300,000.

As you can see, a 3% increase in rates reduces your buying power by over $100,000!

Strategies for High-Rate Environments

1. Increase Down Payment: A larger down payment reduces the loan amount, offsetting higher rates.
2. Buy Points: You can pay upfront fees (discount points) to lower your interest rate.
3. Adjust Expectations: You may need to look for smaller homes or in different neighborhoods.
4. Consider ARMs: Adjustable-rate mortgages often have lower initial rates than fixed-rate loans.

Use our Mortgage Calculator to test different interest rate scenarios and see how they impact your monthly payment.