How do interest rates affect how much house I can buy?

Interest rates directly affect your monthly payment and therefore your buying power. When rates are higher, more of your monthly payment goes to interest rather than principal, which means the same monthly budget buys you a less expensive home. For example, a one percent rate increase typically reduces your purchasing power by about ten percent. Lenders qualify you based on debt to income ratio, so your maximum loan amount drops when rates rise because the payment on any given loan amount goes up. This is why preapproval amounts change as rates move. You can offset some of this by increasing your down payment, choosing a lower price range, or improving your debt to income ratio by paying down other obligations before you buy.