The 1/10 Rule in Real Estate: When 1% Change in Interest Rates Equals 10% Change in Buying Power


Applying the 1/10 Rule to Determine Buyers’ Level of Affordability

The 1/10 Rule is a simple rule meant to help buyers determine a level of affordability in a changing market. The concept is simple and easy to explain:

When interest rates go up by 1%, buying power goes down 10%. The reverse also holds true. When interest rates go down by 1%, buying power goes up 10%.

“Over the last few years, we’ve seen interest rates at historically low rates, and buying power went up,” says Schlosser. “Now that we’re experiencing some increase in interest rates, the buying power is going down.”

Say, for instance, a buyer qualifies for a $250,000 mortgage, but the rate suddenly hikes up 1%. The buyer’s purchasing power drops to $225,000:

$250,000 – $25,000 (10%) = $225,000


5 Ways to Adjust the Buyer’s Purchasing Power with Rising Interest Rates

As noted, rising interest rates don’t automatically have to quash a buyer’s dream of buying a house. They may just need to make a few adjustments and explore their options.


1. Make a larger down payment

If the buyer was contemplating a 15% down on the home and they have access to cash, raising the down payment to 20% can not only offset the higher interest rate, but it may also allow the buyer to negotiate a lower interest rate. Additionally, a higher down payment may prove the difference-maker in a field of competing offers.

2. Adjust the lending terms

According to Schlosser, buyers might look at a 15-year rate, which may offer a more attractive interest rate versus a 30-year rate. With a 15-year rate, the interest will be lower over the life of the loan than the 30-year alternative, and it can help the buyer build equity faster.

Other options, Schlosser says, include Adjustable Rate Mortgages (ARM) or an assumable FHA loan, in which the buyer takes over the seller’s mortgage loan. “FHA loans are assumable. Many people don’t know that.”

3. Take another look at credit history

Of course, buyers should always strive to improve their credit score, but especially when interest rates are moving. Payment history, balances, credit mix and new credit all factor into the credit score of a potential buyer.

4. Limit spending

To improve your buyers’ chances of qualifying for a loan as interest rates fluctuate, counsel clients to practice good financial fitness. For example, they should refrain from making large purchases around the time they’re considering buying, and they’ll want to ensure they don’t miss any payments on bills. Changing jobs can also send red flags to lenders.

5. Move quickly once the offer is accepted

Long escrow periods in a changing market can derail a loan. An appraisal, for instance, can take an unusually long time in some markets. To expedite the process, agents might ask the lender to order the appraisal the day the offer is accepted.


*Karen Schlosser is the Principal Broker, Vice President, Sales Manager of Comey & Shepherd.


Disclaimer: The content within this article is for informational purposes only, and does not constitute financial, investment, or other advice. Opinions and experiences are those of the presenter and may not reflect typical outcomes.


{Source of this article is Dotloop.com articles section.}

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