First Weber Realtors Blog

Most everyone realizes mortgage rates are low and home prices have come off historical highs. But how much do those factors contribute to buying power?

First, consider interest rates. An indicative 30-year fixed rate today is 4.375%. For every $1,000 borrowed, you’ll pay principal and interest of $4.99 monthly. At 5%, that figure increases to $5.36. At 6%, it jumps to $6.00.

A $200,000 home with a 20% down payment ($160,000 loan) carries with it a Principal and Interest payment of $798.85 at 4.375%. At 6.00%, that figure jumps by $160 to $959.28 a month, or nearly $2,000 a year in additional housing expense. That figure will grow as home prices begin a modest improvement upward in the future. A 5% increase in home prices translates to $500 a year in additional expense.

Mortgage rates and home prices also directly affect:

• Mortgage qualifications. Underwriting requirements today typically cap the borrower’s debt-to-income ratio at 45%. Simply put, borrowing less at a lower rate allows more borrowers to qualify.

• Down payment funds required. As prices increase, so does the required down payment.

• The cost of mortgage insurance (MI) for those with less than 20% down. MI is calculated on the loan amount. As prices increase, loan amounts increase, raising the cost of monthly mortgage insurance.

Thank you to Great Midwest Bank for contributing this article.