Many homebuyers assume that rising mortgage rates cause lower home prices, when in fact there is no direct relationship between home prices and interest rates, according to the VP of Applied Economic and Housing Research for Fannie Mae. Increasing rates are a sign that the economy is doing well and incomes are rising. As a result, people can afford more and take out larger mortgages.

Realty Austin is here to clear up some confusion and help you understand the facts about rising rates. After all, owning is 35% cheaper than renting.

Myth: Interest rates don’t affect purchasing power

Fact: Interest rates are projected to increase to 5% in Q4 of 2015.*

The lower your interest rate, the higher your purchasing power. Your purchasing power decreases as interest rates rise which means today at 4% interest you can afford a $400,000 home today, but at 5.1% interest rate, you will only be able to afford a $380,000 home.

*Projected 2015 interest rates from Fannie Mae’s April 2014 report.

Buying Power and the Cost of Waiting in Austin, TX - Buyer's Purchasing Power
Image from Cornerstone Home Lending, Inc.

Myth: Higher interest rates cause lower home prices because homebuyers can’t afford as much.

Fact: Higher rates are a result of a better economy.*

Homebuyers can afford more and are willing to take out a larger loan.

*Dan Green of The Mortgage Reports, says “Mortgage rates are tied to [Federal Reserve] rhetoric more closely than anything else right now… If [the economy is] strengthening, that tends not to have as much impact on the housing market. We’re still in an adjustment-of-expectation phase here.”

Buying Power and the Cost of Waiting in Austin, TX - Affordability Index and Interest Rates
Image from Cornerstone Home Lending, Inc.
Buying Power and the Cost of Waiting in Austin, TX - Dramatic Mortgage Rate Increases
Image from Cornerstone Home Lending, Inc.

Myth: Renting is cheaper than owning

Fact: Homeownership is 35% cheaper than renting in all of the 100 largest metros.*

Every time you pay your mortgage, your net worth increases as you build up your net monthly savings.

*On average, a homeowner’s payment is lower than the renter’s monthly payment after only 6 years, according to Realtor.org

Buying Power and the Cost of Waiting in Austin, TX - Renting Vs Buying
Image from Cornerstone Home Lending, Inc.

Why is it important to ignore these myths?

The time to buy is NOW!

As interest rates and home prices increase, your buying power decreases and could really cost you in the future. As rates increase just 1%, your buying power could go down by 10%. The cost of waiting just one year could negatively impact your effective buying power, significantly – as home prices go up 4% every six months, your buying power decreases by 9-13.5%.

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