Your Road Home: CHFA Homeownership eNews

how rising interest rates affect purchasing power

If you are in the market to buy a home, you’re probably aware that the U.S. economy is experiencing high inflation right now, and that to control inflation, the Federal Reserve has been raising short-term interest rates since mid-2022. You’ve probably also heard that there is the possibility for more rate hikes in the second half of 2023.

When the Fed raises short term interest rates, it tends to lead to higher interest rates across the economy, including mortgage rates. If you are considering buying a home, higher mortgage rates may impact your purchase in the following ways:

1. You may qualify for a lower loan amount. While the amount you can afford for a monthly mortgage payment is probably relatively the same as before the rising interest rates, the increased interest rates have resulted in higher monthly mortgage payments for the same home purchase price. Working with a lender will help you determine how much of a monthly payment you can afford based on the ratio of the debts you owe compared to your gross monthly income (your debt-to-income ratio, or DTI).

2. You may have difficulty finding homes in your price range. While historically, rising interest rates have resulted in sellers lowering prices, 2023’s housing demand exceeds available inventory, so across the nation higher sales prices are being sustained. However, the higher interest rates have priced some borrowers out of the market, so if you do find a home that works financially, you may have less competition.

3. Ultimately, higher interest rates mean higher mortgage payments. It is important to work with your lender to determine the overall cost of a home, beyond the sales price, so you can set your search parameters within boundaries you can afford. As a reminder, CHFA generally recommends spending no more than 33% of your gross monthly budget on a mortgage payment.

don't despair: what you can do next

1. Pay down your debt. Your debt-to-income ratio (DTI) is reviewed by lenders to determine what you can afford for a monthly payment. The lower your debt in relation to your income, the more monthly payment you can afford. There are two methods that people typically use to reduce debt: pay off the debts with the biggest monthly payments first or you may opt to pay off the debts with the highest interest rates first.

2. Improve your credit score. Your credit score illustrates to lenders how you’ve been able to manage debt in the past and can impact your interest rate. A higher credit score generally results in a lower interest rate. Learn what impacts your credit score here.

3. Build your savings for a down payment. Another factor that may impact your interest rate is your down payment. The more money you have to put towards a purchase, the less a lender has to loan, which means less risk to them, and may result in a better interest rate for you. CHFA offers down payment assistance which can supplement any savings you have made so far.

4. Trim your budget. Finding small ways to cut back on expenses can make it easier to pay down existing debts or save for a down payment. Every little bit counts: view 22 ways to save money, courtesy of NerdWallet.

chfa homeownership contest: what's your top 5?

To celebrate Homeownership Month, this June, CHFA invited homeowners to share what they loved about homeownership for a chance to win a $500 Visa gift card. After receiving almost 300 submissions, William from Fruita, Colorado, was selected as our winner!

William’s “Top 5” things he loved about homeownership are listed below. One of his favorites is his view of the Colorado National Monument, which is shown in his submitted photo.

Thank you to all who participated and congratulations to William!

1. I have my home in a beautiful area that has large backyard for my dogs.

2. I'm building equity in my home.

3. My house is located in Fruita, Colorado, and affords me the opportunity to be part of my community.

4. I enjoy working my yard and doing upgrades around the house.

5. I have a great view from the back of my home of the Colorado National Monument.

Pictured: Top 5 photo submission, courtesy of CHFA homeownership customer William

Colorado Housing and Finance Authority

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