Interest Rates and Purchasing Power: The 1% and 10% rule

Written By Mark DePaul

Interest rates! Inventory! Climate Migration! Asset Inflation! All things that I hear when people take about how crazy the market is right now, not just in Tacoma, but nationwide. These are all very legitimate factors in the record appreciation that we’ve seen. Today I want to talk about how interest rates affect your purchasing power.

Tacoma has seen an average price for sale appreciation of 17.7% (Source: The News Tribune) over the the previous year, buyers and sellers a like have noticed. While there’s several factors that have gone into this record appreciation, a major one is the interest rates. As of July the Average Commitment Rate on a 30 year fixed mortgage is 2.87% compared to 3.02% in 2020 and 3.77% in 2019, almost a full 1 percent drop over 2 years. (According to Freddie Mac)

What’s the effect on my payment?

As a general rule for every 1% that interest rates climb buyers lose 10% of their purchasing power when utilizing a 30 year mortgage. Let’s look at at comparison below.

Screen Shot 2021-08-23 at 11.26.59 AM.png

2.875% @ $500,000 Purchase

  • 30 year fixed rate mortgage

  • 20% down

  • $2,127 monthly payment

3.875% @ $450,000 Purchase

Screen Shot 2021-08-23 at 11.41.47 AM.png

3.875% @ $450,000

  • 30 year fixed rate mortgage.

  • Utilizes same downpayment as above (22.22%)

  • $2,075 monthly payment

Calculator curtesy of Penrith Home Loans

If your monthly payment is an important factor in your purchasing decisions you can see that a rise in interest rates can mean falling into a lower price bracket. Interest rates are still historically low and how long that lasts is not for me to say. There are other factors that play into the local housing market appreciation so if monthly payments are of major concern it may be time to talk to a trusted REALTOR® or your preferred lender to discuss options.

Mark DePaul
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