How Interest Rates Affect Affordability

Interest rates are the single biggest lever on housing affordability. A 1% change doesn't just nudge your payment — it reshapes what you can buy. Here's the math.

The monthly payment math

On a $400,000 home with 20% down ($320K loan):

• ▸5.5% → $1,817/mo, $334K total interest over 30 years
• ▸6.5% → $2,023/mo, $408K total interest
• ▸7.5% → $2,237/mo, $485K total interest
• ▸8.5% → $2,461/mo, $566K total interest

A 2% rate increase is $420/month more and $151K more in total interest.

The affordability ripple effect

Rate increases don't just raise payments — they shrink purchasing power.

Example: a buyer qualifies for a $2,000/mo housing payment.

• ▸At 5.5%: qualifies for a $339K home
• ▸At 7.5%: qualifies for a $282K home
• ▸Difference: $57K of lost purchasing power from a 2% rate move

This is why rate cycles reshape markets: when rates rise, the same buyer can afford $57K less house without changing their income or savings.

What you can control

• ▸Your credit score — a 760+ vs. 680 score can mean a 0.5–1% rate difference. Improve before applying.
• ▸Your down payment — 20% down gets the best pricing and avoids PMI.
• ▸Your loan term — a 15-year loan runs ~0.25–0.5% lower than 30-year.
• ▸Shopping lenders — rate spreads between lenders on the same loan can be 0.25%+. Shop 3+ within 14 days (one credit inquiry for scoring).

What you can't control — and how to handle it

Market rates move with the Fed and the economy. Your move is to buy what you can afford at today's rate, then refinance if rates fall — the Amortization Calculator with the live FRED rate shows your exact payment at today's rate, and the Refinance Planner shows the break-even if rates drop.