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How Interest Rates Affect Your Home Buying Power

Interest rates play a big role in how much home you can afford, and even a small change in rates can make a huge difference...

  • Suzanne Damon
  • November 4th, 2024
  • 4 min read
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Interest rates play a big role in how much home you can afford, and even a small change in rates can make a huge difference in your budget. Whether rates are high or low, understanding how they impact your buying power is key to making smart decisions when it comes to purchasing a home. Here’s what you need to know.

What Are Interest Rates?

Interest rates are essentially the cost of borrowing money. When you take out a mortgage, the interest rate determines how much you’ll pay the lender on top of repaying the loan itself. Higher rates mean you’ll pay more over time, while lower rates keep your monthly payments down and reduce the overall cost of your home.

How Interest Rates Impact Monthly Payments

The most immediate way interest rates affect your buying power is through your monthly mortgage payment. Here’s how it works:

  • Low interest rates = lower monthly payments, which means you can afford a more expensive home while staying within your budget.
  • High interest rates = higher monthly payments, which can limit the price range you’re able to shop in.

For example, if interest rates are low, a $300,000 home may fit comfortably within your budget. But if rates increase by even a small percentage, that same home could become too expensive based on the monthly payment alone.

Interest Rates and Loan Amounts

When interest rates rise, lenders may approve you for a smaller loan because your monthly payment would need to stay affordable based on your income. This reduces the maximum price of the home you can afford. On the flip side, when rates are low, lenders may approve you for a larger loan, increasing your home buying power.

That’s why paying attention to the current interest rate environment is important—because it directly influences how much house you can afford to buy.

The Long-Term Cost of Higher Interest Rates

Even if you can manage higher monthly payments, high interest rates mean you’ll pay significantly more over the life of the loan. For example, on a 30-year mortgage, a 1% increase in interest rates could result in tens of thousands of dollars in additional interest paid over the life of the loan. That’s money that could be going toward home improvements, savings, or other financial goals.

Locking in Rates: Why Timing Matters

If rates are low when you’re ready to buy, locking in that rate can save you money for the life of your mortgage. Most lenders offer a rate lock, which guarantees your interest rate for a set period (usually 30 to 60 days) while you finalize your home purchase. This protects you if rates rise before you close on the home.

Conversely, if rates are high but you need to buy a home, there are options to refinance later when rates drop. Refinancing allows you to get a lower rate down the line, reducing your monthly payments and overall interest costs.

How to Maximize Your Buying Power in Any Market

Interest rates fluctuate, but there are strategies you can use to maximize your buying power no matter what the market looks like:

  • Boost Your Credit Score: The better your credit score, the lower your interest rate will be. Pay off debts, make on-time payments, and avoid taking on new credit to give your score a boost before applying for a mortgage.
  • Shop Around for Lenders: Don’t settle for the first interest rate you’re offered. Different lenders may offer different rates based on your financial profile, so it pays to shop around for the best deal.
  • Make a Larger Down Payment: The more you can put down upfront, the less you’ll need to borrow. This can help reduce your monthly payments and offset the impact of higher interest rates.

Interest rates may seem like just a number, but they have a direct impact on your home buying power and overall budget. By understanding how rates affect your monthly payments and loan amount, and taking steps to improve your financial position, you can make the most of your money and find the home that’s right for you—no matter what the market is doing.

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About the author

Suzanne Damon

603-493-5561
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A long-time resident of the Manchester, NH area, Suzanne Damon has been a powerhouse in real estate for the past 29 years. Ranked among the top-producing agents in both New Hampshire and the United States, she leads The Damon Home Team with expertise, integrity, and a deep commitment to her clients. Suzanne’s entrepreneurial spirit started early—at just seven years old, she was pulling a wagon through the city, selling flowers from her garden. That same determination carried her through college debt-free and has fueled her success in the ever-evolving real estate market. She understands the rollercoaster of life and knows firsthand the challenges that come with buying or selling a home. Beyond real estate, Suzanne is the President of 1628 Group, a real estate development company focused on community growth. She is also deeply involved in giving back—serving as a Court Appointed Special Advocate (CASA) for children in need and proudly supporting Liberty House, a local organization dedicated to helping homeless veterans rebuild their lives. Hardworking, caring, and genuinely fun to work with, Suzanne and her team bring a no-pressure, results-driven approach to every transaction—because achieving your real estate goals should be exciting, not stressful. Reach out: www.TheDamonHomeTeam.com, 603-493-5561 call or text.

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The Damon Home Team

The Damon Home Team

4 Bell Hill Road, Bedford, NH 03110

The Damon Home Team

4 Bell Hill Road, Bedford, NH 03110

888-398-7062 *125
[email protected]
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