Interest Rate vs. Purchase Price

How much does interest rate affect your monthly payment in Atlanta? Last week was crazy. Interest rates went down below 3%, and then within 48 hours back up to close to 4%. At the same time, I know a lot of buyers are waiting on the sidelines to see if home prices are going to be affected by the current health situation that’s going on. So I thought right now it’d be the perfect time to talk about the correlation between interest rates and purchase price, and how that can affect your ability to build equity in your home.

Let’s say that you wanted to purchase a $300,000 home at an interest rate of 3%, your monthly payment would be $1,265. Now keep in mind, this is the monthly payment before you include tax and insurance and HOA fees and all those kind of things. Now let’s say that home prices dropped by 10%. That $300,000 home now costs $270,000 but interest rates go from 3% up to 4%. That’s gonna make your monthly payment now $1,289 a month.

Now let’s take that a step further and look at how the lower interest rate will help you build equity over time. So in scenario number one, where the interest rate is 3%. $750 a month is going toward interest and $510 a month will go toward paying off the principal balance of your loan. However, in scenario two, where the interest rate is 4%. $990 a month is going to pay interest and only $442 a month is actually going to pay your principal balance.

Okay, so let’s take it one step further. And imagine that interest rates go up to 6%, which is where they were in 2007 right before the last recession. In that scenario, the majority of your payment each month is going toward paying interest and only $299 a month is actually going to pay the principal balance of your loan. You can see in this scenario how having a lower interest rate will help you to pay off that loan and pay off the principal balance faster than in those higher interest rate scenarios.

I really hope you found this information useful. As always, please feel free to reach out to me anytime if I can answer your questions. (912) 674-2518. And remember, you have to be in the market to take advantage of the market.

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