Rate change - what does it do to your buying power?

OK, breathe...Mortgage rates are up from 6 percent to 6.75 percent. What does this mean to someone who is thinking about buying a home?

First: look at the numbers. The higher rate increases a mortgage by an extra $50 per month for every $100,000 you borrow. How many hundred thousand are you borrowing for you home? Do the math. That extra $250 a month in interest on a $500,000 loan costs about as much as paying $40,000 more for the home.

Depending on what you are borrowing, this could be the straw that breaks the camel’s back. Are you that camel?

What I always tell my buyers is that they need to keep an eye on their monthly payment, not on the amount of their loan. This means calculating the taxes (they go up, too!), insurance and utility costs to make sure that they keep out of trouble.

What I just told a seller (who I was negotiating against), in my oh-so-subtle-way, is that he needs to think about this sudden shift in interest rate. The buyers who just inspected his home are now facing an additional $250 a month because the rates have changed since they made their offer.

Hold onto your hat, buyers and sellers, there is a bumpy ride ahead! I see a lot of buyers who are trading up, or using large down payments; this gives them an advantage right now. So it is not a certainty that prices will come down to compensate for this rate change. (I wish they would – I’m a buyer’s agent!)

What are you going to do?