As if this market isn’t hard enough on buyers, now you are getting hard-sell tactics about the rising interest rates. Buyers who are getting a mortgage to purchase need to pay attention to the interest rate that they are pre-approved at. Their buying power may go down, as interest rates rise.

All mortgages are calculated based on the borrower’s ability to repay it. So, if your monthly costs go up, based on a higher interest rate, you may not be able to borrow as much as you could three months ago. Keep an eye on that interest rate on your pre-approval letter. If it is 3.5%, you need to get it updated.

Fluctuations of one quarter percent. If your rate changed from 3.5 percent to 3.75 percent, the cost would be an additional $14 per month, per $100,000 of principal. This increases slowly to $15 per month, per $100,000 when the interest rate changes from 4.5 to 4.75 percent. So, calculate somewhere between $15-20 per month per $100,000, if your rate is going up .25 percent from what you were originally quoted.

Here’s an handy-dandy calculator to do this math yourself.

Buyers who have been waiting for the spring market are now faced with a typical interest rate of about 4.42%, when the rate in January was 3.1%. I am going to round this up, just to make the point clear. If you are borrowing $500,000 and the rate has gone up a full 1.5%, you will be paying an additional $428 per month on principal and interest. That’s $5136 a year.

If your debt to income ratio is tight, it could mean you will need to borrow less. So, once again, people entering the real estate market are the ones disproportionately harmed by the rising rates. That roughly $5000 a year will break some buyers, others can absorb the higher payments.

Work arounds:

Increasing your down payment. If you borrow less, you pay interest on less money. Some people are borrowing from their savings to avoid higher monthly payments. This will work, as long as you have funds available to maintain your house. It is a bad idea to buy without a reserve.

Choosing a variable rate mortgage. For borrowers who are at the beginning of their careers, variable rate mortgages make sense. The way they work: you will get a lower rate at the beginning of the loan for a certain number of years. Then, the rate goes up on a schedule. It is calculated at X% above the rate at the time of the resets. Your lender can calculate the worst case scenario if you do not refinance out to a variable rate mortgage.

For people at the beginning of their careers, this is a good option. In seven years, you are likely to be earning more. That makes it less likely that you will get stuck unable to refinance out of a mortgage that has reset to an interest rate higher than the market is bearing at that time. NerdWallet explains this in more detail.

Advice:

  • Don’t listen to the sales rhetoric! The rising interest rates will affect the market. However, some of those effects will benefit buyers by discouraging demand.
  • When you discuss your potential mortgage with a lender, require that the lender calculate your monthly payments, with insurance and taxes.
  • Ask your lender to tell you what interest rates are doing, right now, and what they expect. Their fingers are on that pulse all the time, so they can make a guess at it.
  • Calculate out a worst-case, and buy accordingly.