Are you aware that interest rates have a direct affect on what one can afford?  Below is a illustration on how much purchasing power is lost with interest rate increases. Here is the mathmatical breakdown:

Let’s use the Current Rate

• Interest rate – 5.25%
• Desired monthly mortgage payment – $4,418
• How much home can you afford?  $1,000,000

Let’s say rates go up 1%.  How does that change the scenario?

• Interest rate – 6.25%
• Desired monthly mortgage payment – $4,418
• How much home can you afford?  $896,922

Let’s say rates go up 2%.  What can you shop for now?

• Interest rate – 7.25%
• Desired monthly mortgage payment – $4,418
• How much home can you afford?  $809,541

You can see that if rates go up just one percent, your purchasing power decreases by $103,078.   And if rates go up two percent, your purchasing power goes down $190,459!  Two hundred grand is a lot of house.

We are already seeing the expected increase in rates as the economists projected.  Those waiting for the market to bottom out could negate any savings by paying higher rates in the future.  Just something to think about if you’re currently playing the sidelines and are planning to own long term.

Another thing to keep in mind:  When the  first signs of a recovery become known, you won’t be alone in purchasing a home. Right now the Palos Verdes and South Bay home inventory is on your side. You can basically “write your own ticket” for the property you desire. It won’t be long until all the buyers flood the market and start over bidding on properties, forcing you to settle for your second or even third choice.