Lower Rates Equal More House
Sound familiar? Of course it does, itís a common mantra these days and so often heard that consumers may simply tune it out. The recent Fed action of purchasing $40 billion per month in mortgage-backed securities resulted in lowering interest rates even further to interest rate levels never before seen.
Those who have been considering refinancing may have already done so this year and even if they missed out on the current rates, they didnít miss out by much, as rates have dropped by about .25 percent since the Fed stepped in.
But really, how much does all this mean? Is .25 percent a substantial drop? No, not if your current rate is somewhere around 3.75 and 3.50 percent is readily available. Is 1.00 percent enough to explore these new rates? Probably, but what about a 1.50 percent drop? Definitely. But interest rates donít always involve a refinance, even though refinance applications outnumber purchase loans.
So how can we put that into perspective? What if you are considering buying a home right now, what do these lower rates really mean in terms of real money? Letís compare these current low rates with those seen over a year ago, back in early 2011.
A 30 year mortgage rate could be found in February 2011 at around 5.25 percent. Today, that same loan is about 3.25 percent, or a 2.00 percent drop. What does that mean?
Lower Rates Equal More Buying Power
First, it lowers your mortgage payment. Thatís obvious but letís take a close look at the impact of a rate that is 2.00 percent lower. On a $300,000 30 year mortgage, a 5.25 percent rate results in a $1,656 per month payment. A 3.25 percent rate drops the payment to $1,305 per month, or a savings of $351. Thatís huge.
Yet an oft overlooked facet of lower rates is how lower rates affect your buying power. In other words, how much more can you borrow with a 3.25 percent rate compared to those available less than 18 months ago?
Lenders used debt-to-income ratios during the loan approval process and a standard debt ratio is around 38 percent, give or take. Using this example of a $300,000 mortgage and an additional $500 per month for property taxes and insurance, the approximate income to qualify for this loan is $4,750 per month. By applying a 5.25 percent rate to the same scenario, the monthly income needed to qualify rises to $5,673 per month!
Now letís look at the impact of mortgage rates compared to how big of a house you can buy. Letís assume your gross monthly income is $5,000 per month and you have a 20 percent down payment available for a home you will buy. Using the same tax, insurance and debt ratio assumptions, making $5,000 at 5.25 percent means a loan amount of about $254,000 with a sales price of $317,500.
Now, letís apply the current 3.25 percent rate to the equation and the result is a $321,600 mortgage amount and a $402,000 sales price. Thatís an increase of $84,500 in buying power with the exact same monthly income by applying a lower rate!
Go ahead and take a look around at the differences between homes in your area selling for $317,500 and ones selling for $402,000. See a difference? Of course you do. Thatís the power of interest rates. They do make a difference. And if youíre thinking of buying a home right now, these low rates should convince you that now is the time to buy. Quit thinking and start looking.
The rates in this article are for demonstration purposes only and shouldn't be misunderstood to be mortgage rate quotes. Individual circumstances may vary.