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How Do Rising Interest Rates Affect Nashville Home Buyers?

Posted by Scott Layson on July 16, 2013
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With all-time low interest rates, we have seen the housing economy come roaring back to life here in middle Tennessee.  Families looking to purchase homes in Nashville have been able to get much more bang for their buck when financing, than in any time in recent memory. Rates are still favorable for home buyers, but according to the Mortgage Banker’s Association, from the months of May to July, the average interest rate for a 30-year fixed-rate mortgage rose from 3.59 percent to 4.68 percent.

With that increase, interest rates are the highest they’ve been since 2011.  However, I don’t want to beat the war drum and strike fear about rising interest rates.  I think we all need to understand that these were record lows we were witness to, so we should take the percentage hike with a grain of salt.  But if you were in the right position to take advantage of these low rates, then you should feel extremely satisfied about your investment..

How Rates Affect Home Buyers

So how do rising interest rates affect your home purchasing power?  Here’s how it works:  Every time rates rise 1 percent, your purchasing power decreases by 10.75%.  We just did an article on the fact that Nashville achieved an all time high for home sales prices eclipsing the $200,000 mark so we’ll use that as an example.

Let’s say you’ve been pre-approved for $200,000 at the rate of 3.59%.  If the rates rise 1 percent to 4.59%, you would now only qualify for $178,500.

Amount approved for: $200,000 x 10.75(1% increase) = $21,500            

New amount you would be approved for:  $200,000 – $21,500 = $178,500

This could push some home buyers out of prospective neighborhoods they were interested in.  With this in mind many experts actually expect the housing market to continue to strengthen for the time being.  Doug Duncan, the senior Vice President and chief economist at Fannie Mae, who was quoted in the USA Today, shares his reasoning for this:

“Consumers may recognize that today’s still favorable mortgage rates and home ownership affordability levels will recede over time.  Given rising home and rental price expectations and improving personal financial attitudes, more prospective homebuyers may be deciding that now is the time to get off the fence.”

So when looking to purchase a home in Nashville, it’s important that we make sure to be in tune with what the mortgage industry is doing, because rates are very fluid right now.  Currently, homebuyers can still expect to get very aggressive interest rates compared to historical rates.

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