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Interest rates play a big role in how much home you can afford, and even a small change in rates can make a huge difference in your budget. Whether rates are high or low, understanding how they impact your buying power is key to making smart decisions when it comes to purchasing a home. Here’s what you need to know.

What Are Interest Rates?

Interest rates are essentially the cost of borrowing money. When you take out a mortgage, the interest rate determines how much you’ll pay the lender on top of repaying the loan itself. Higher rates mean you’ll pay more over time, while lower rates keep your monthly payments down and reduce the overall cost of your home.

How Interest Rates Impact Monthly Payments

The most immediate way interest rates affect your buying power is through your monthly mortgage payment. Here’s how it works:

• Low interest rates = lower monthly payments, which means you can afford a more expensive home while staying within your budget.

• High interest rates = higher monthly payments, which can limit the price range you’re able to shop in.

For example, if interest rates are low, a $300,000 home may fit comfortably within your budget. But if rates increase by even a small percentage, that same home could become too expensive based on the monthly payment alone.

Interest Rates and Loan Amounts

When interest rates rise, lenders may approve you for a smaller loan because your monthly payment would need to stay affordable based on your income. This reduces the maximum price of the home you can afford. On the flip side, when rates are low, lenders may approve you for a larger loan, increasing your home buying power.

That’s why paying attention to the current interest rate environment is important—because it directly influences how much house you can afford to buy.