Can You Afford a Home If Mortgage Rates Jump By 1 Percentage Point? Here's the Answer.

Freddie Mac said Thursday that the 30-year fixed rate increased slightly to 4.14 percent this week, staying near the low for the year.

But interest rates are likely to rise steadily into next year, and a full percentage point increase is not out of the question.
The real estate site Zillow did some research to answer the question: Can you afford to wait and buy a home if rates go up by a percentage point?
Zillow applied next year’s forecast home values and a 1 percentage point interest rate increase to the median home price in 35 U.S. metro areas. Zillow then calculated the difference in mortgage payments. The results for some areas are striking.
Of course, the higher the home prices, the bigger the monthly payment jump. For example, in San Francisco, a percentage point increase means $556 more a month.
“More often than not, buyers do not understand the profound effect of rising interest rates on affordability,” said Erin Lantz, vice president of mortgages at Zillow. “Many buyers associate a 1 percentage point interest rate change with a 1 percent change on a piece of clothing or the price of a car, when in fact they are very different.”
As a rule of thumb, Lantz said, a 1 percentage point increase in mortgage rates reduces affordability by 10 percent.
See the graphic below for the results, or read Zillow’s blog post here.
Mortgage1Percent_Zillow_Aug2014

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