Here's how to understand the way current mortgage rates work, and how they can impact your home buying power.
How Rates Affect AffordabilityThe interest rate you get when you take out a mortgage determines the value of the overall loan, which is based on what you can afford to pay back in terms of your income and monthly expenses. That means the higher the interest rate, the lower the total amount of the home financing you can get-and the less "house" you can afford to buy. Surely, you aren't going to be affected by a half a percentage point change, however, or even a full percentage point?
Surprisingly, any movement in the rate can affect you more than you expect. While a change of this sort might not stop you from going ahead with your purchase, it can certainly have an impact on the floor plan and finishes you choose. So, before you get caught up in the excitement of browsing our home design center to try out different options, it's a good idea to do your homework and determine what you can afford. Many bank and lender websites offer a home loan calculator you can use to get some clarity.
Qualifying for a MortgageMortgage lenders today use various factors to determine whether you qualify, and for how much. Most lenders will only approve a mortgage if it results in a total monthly debt repayment of not more than 40 to 45 percent of your income.
Example: If your total household income is $10,000 a month and you're repaying $2,000 on car payments, credit cards and student loans, you're unlikely to find a mortgage loan that requires payment of more than $2,000 or $2,500 a month. Occasionally, you may be able to push this slightly higher if you can show any of the following:
- Your car payments are almost finished, and you have fewer than 10 instalments left.
- You're able to defer your student loan repayments for a minimum of 12 months ahead.
- You have other non-taxable income coming in regularly for the next 36 months (such as pension disbursements, social security and annuities), which is calculated at 125% of its value for mortgage purposes.
How Mortgage Rates Change AffordabilityRecently, mortgage buyer Freddie Mac announced the rate on 30-year, fixed-rate mortgages dropped from 3.89 percent to 3.86 percent. Just one year ago, the rate was 3.43 percent, with an average of 3.65 percent for 2016 as a whole. So, the fact that the rate is coming down might be bad news for some investors, but whether you're considering building or are looking for a move-in ready home, for potential homebuyers trying to find a mortgage loan it's actually good news. Here's why:
From this table, you can see the difference in buying power you get for the same monthly payment but with a lower mortgage rate. And although it has been quite a while since rates went over 4 percent, it's clear that you can buy a lot less house for the same monthly payment.
The take-away from this is that it's vital to know exactly what you can afford before you start shopping for your new home. That way, when you see styles and finishes that really speak to your heart, you'll avoid many of the typical regrets homebuilders experience.