How Interest Rates Impact Buying Power

Why Even a 1% Change Can Affect What You Can Afford

If you're planning to buy a home — or you're just watching the real estate market — you’ve probably noticed how often interest rates come up in the conversation. But what do they really mean for you as a buyer?

In short: interest rates directly impact your monthly mortgage payment, which in turn determines how much home you can comfortably afford.

Here’s a breakdown of how it works — and why even small changes in rates can have a big effect on your homebuying journey.

1. What Is “Buying Power”?

Buying power refers to the maximum home price you can afford based on your:

• Income

• Debt

• Down payment

• Interest rate

When interest rates go up, your monthly payment goes up — meaning you may have to lower your target price range to stay within budget.

2. How Much Does 1% Really Matter?

Let’s look at a simplified example:

$400,000 loan amount (30-year fixed mortgage) At 5% interest: $2,147/month At 6% interest: $2,398/month At 7% interest: $2,661/month

That 2% increase adds over $500/month to your mortgage payment — and may reduce your buying budget by tens of thousands of dollars.

3. Higher Rates Shrink Your Budget

Here’s the catch: most buyers shop based on the monthly payment, not the sticker price. So when rates rise:

• You qualify for less house at the same monthly payment

• You may need to adjust your search criteria (smaller home, fewer upgrades, different area)

• Sellers may feel downward pressure on pricing, especially in mid-range markets

4. Lower Rates Can Expand Opportunities

When rates drop — even slightly — your buying power increases:

• You can afford a more expensive home while keeping payments steady

• You may be able to lock in better terms or afford upgrades you previously ruled out

• It becomes easier to compete with other buyers, especially in multiple-offer situations

5. Why Sellers Should Pay Attention Too

Even if you’re not buying, interest rates still impact you:

• Fewer qualified buyers = potentially longer time on market

• Sellers may need to adjust pricing strategies in high-rate environments

• Offering buyer incentives, like rate buydowns or closing cost credits, can help deals move forward

6. Adjusting Your Strategy Based on the Market

If rates are high:

• Get pre-approved early to understand your real limits

• Consider adjustable-rate mortgages or rate buydown options

• Shop for homes below your max budget to create room for flexibility

If rates are low:

• Take advantage of stronger buying power

• Move quickly — low-rate windows don’t last forever

• Consider longer-term financial stability when choosing your loan

Final Thoughts

Interest rates aren’t just numbers — they shape what you can buy, how much you’ll pay over time, and when the right time might be to make a move.

Need help understanding your buying power in today’s market?Let’s connect. I can walk you through current rate trends, connect you with trusted lenders, and help you create a smart plan for buying with confidence — no matter where rates stand.