How a 1% Increase in Mortgage Rates Affects Home Prices

Simply put, as mortgage rates rise, monthly payments rise, which means prices should fall. That or people settle for cheaper homes.

Since many people buy homes based on monthly payment cost rather than home price, it is worthwhile to look at what happens to home prices and payments when interest rates rise, as is currently happening in the mortgage market.

Let’s look at an example. (These numbers do not include PMI, property taxes, down payment, or insurance.)

Fred wants to buy a home for 1 million dollars at 3% interest. His payment is $4216. If you increase the interest rate to 4% Fred can only borrow $883,000 if he wants to keep that same payment of $4216. This is an 11.7% decline.

To keep the same payment at 5% interest Fred can only borrow $786,000, a 21.4% decline.

The same payment at 6% interest means Fred can only borrow $704,000, a 29.6% decline.

At 7% interest he can only borrow 635k.

Roughly, every one percent increase in the mortgage rate equals a 10% decline in the home price.

Currently, interest rates have increased from 3% to 6%. A few things could happen:
(1) Home prices will drop by 30%

(2) Those who qualified to buy a home for 1 million dollars will have to settle for a home priced at $704,000 at 6% rates.

(3) The general population’s income will have to rise substantially to qualify for the same prices at higher rates.

(4) 40 and 50 year mortgage terms are rolled out.

I don’t think sellers or real estate agents realize how drastic a change happens when interest rates go from 3 to 4%. That equals an 11.7% decrease in the home price. Whether this will play out in the housing market is anyone’s guess. The federal reserve backed american command economy doesn’t follow any typical rules.

Either way, the real estate market has changed dramatically, and unless you can score a great deal, 20-30% off the price of a home, you are only hoping the fed rides to the rescue with declining interest rates.

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