Can you still qualify? The impact of rising rates

Mortgage rates have begun to rise and economists expect the upward movement to continue.

From the 3.9 to 4.0 percent average rate in the past five months on a 30-year fixed mortgage, the new rates will soon be in the range of 4.3 to 4.6 percent, according to Lawrence Yun, chief economist for the National Association of Realtors.

Usually the initial phase of rising rates can quicken the decision to sign on the dotted line as consumers do not want to face even higher mortgage rates later on. However, a prolonged increase will shrink the pool of eligible homebuyers.

Let’s say a person is committed to paying at most $1,000 per month in principal and interest to be comfortably within this person’s budget. At a 3.9 percent rate (last week’s rate), this homebuyer will be able to take out $212,000 in mortgage amount. At 4.5 percent (near future rate), the figure drops to $198,000, or the equivalent to a drop of 7 percent in purchasing power.

Another way to view the impact of rising rates is to compute the income required to get the $212,000 in mortgage funds as in the above example. At 3.9 percent, the income would have to be $4,000 per month, assuming that this particular person only feels comfortable with a mortgage payment taking up 25 percent of his or her income.

At 4.5 percent, the mortgage payment to buy that same home would be $1,074 per month and the corresponding monthly income requirement would be $4,296.

Simply put, if mortgage rates rise to around 4.5 percent in the upcoming weeks from the previous 3.9 percent, then home sales are expected to be impacted by 3 percent. If the 30-year fixed mortgage rate rises to 5 percent then the impact is closer to 6 percent.