How I had to Settle for a One Bedroom When I Really Wanted a Two Bedroom

Posted by James Marsden on Thu, Dec 09, 2010

[This is a post from James Marsden, a buyer agent on our team here at Charlesgate Realty Group. If you have any questions, please comment below or contact James].

Buying Power Lost

Everyone’s financing decision, whether it’s a car, home or, for that matter, what they put on their credit card is based on how it fits into their monthly budget.  The purchase price isn’t as important as long as every month there’s enough money to pay for it.  Well that monthly amount, what you can afford or are willing to pay each month, represents your Buying Power.

What is Buying Power

When it comes to purchasing a home, Buying Power represents the amount of money you have between your down payment and the amount of money a bank or mortgage company is willing to lend you.  This is based upon a variety of criteria such as credit scores, length of employment, and how much money you make.  Down payment plus amount of money the bank will lend you equals your total Buying Power (how much  home you can afford).

What Affects Buying Power

This is where interest rates and the 10 year treasury yield come into play.  As treasury yields go up so do interest rates.  As interest rates go up, the amount you’re able to finance goes down.  How dramatic can this drop be?  Take the following example:

Let's assume (on November 1st), you qualify for a condo in the South End for $400,000 with a 30 year fixed rate loan and 10% cash down payment.

On November 1st, 2010 interest rates in Boston were 4.13% for a 30 year fixed rate loan. Your monthly payment of principal & interest was $1,486.80. Today, just a month later that same 30 year fixed loan is at an interest rate of 4.75% and the payment is now $1,699.20, an increase in your monthly payment of $212.40

If your qualification amount was based on that original monthly payment of $1,486.80 and rates are now 4.75%, your Buying Power has just been reduced by $45,000. In other words now you’re looking at units at $365,000.  So you can forget about that extra bedroom and the storage space in the basement - and now you’re six blocks to the T station instead of two.

The Moral of the Story

The moral is, waiting to buy (for whatever reason) can have consequences and sometimes they’re bigger than you may realize. In other words you can’t time your purchase with the end of your lease or time it because you want to look in the spring without having an effect on your Buying Power.

Will rates go back down?  Or will they continue up?  That’s the proverbial $1 million question.  Right now, banks and corporate America are sitting on the sidelines with over a trillion dollars to lend, but just not at these rates of returns.  So what I think you’re going to find is that interest rates might bounce up and down a little bit in the near term, but the long term trend is for them to rise.  Which means your Buying Power will go down.  This can alter what you are looking at for a home, or sometimes scuttling your home purchase altogether. 

[For more information or an appointment to discuss you real estate needs feel free to contact James Marsden, a Buyers Agent at Charlesgate Realty Group, at 845-800-0112 or by email at]

Tags: financing