subject: How the Interest Rate Affects Your Purchase Price [print this page] A lot of the financial news is focusing on the low mortgage rates and how this can benefit first time home buyers. People with 18 financial degrees, multiple letters popping up after their name and lots of experience are constantly barking about how this is a great time to buy a home. But nobody takes the time to explain why this is so good. Here is a little math lesson that will hopefully shed some light on the subject.
Just a few years ago the financial market was excited about the low rates of 6.5% for first time home buyers. Today, several places are advertising rates of 4.5% for a 30 year fixed mortgage. Here is how that 2% difference plays into the home buying process.
Let's start with a person's income. The average household income for 2008 was $52,000. If we divide that number by 12 we get $4,333 which is the monthly gross income. This is the figure that mortgage lenders use to qualify a first time home buyer for the loan. A second calculation is to take 29% of the monthly gross income, which in our example would be $1,256. The 29% is another guideline for mortgage lenders. Most lenders will not approve a loan if the mortgage payment is more than 29% of the gross monthly income.
Now, let's do a little backwards math. Using the payment amount of $1,256, the rate of 6.5% and a term of 30 years we get a loan of $198,172.79. If we change just the interest rate to 4.5% and keep all the other numbers the same, the new loan amount is $247,885.62. That is almost a $50,000 difference in loan amounts. That means that at today's low rates first time home buyers can afford a much more expensive home and most likely a bigger home for the same monthly payment.
News agencies will put a spin on information to satisfy their needs. Salesman will pitch, push and do anything to make a buck. But numbers don't lie. Today's rates offer a great opportunity for first time home buyers to get into a really nice home at a comfortable price.
How the Interest Rate Affects Your Purchase Price
By: Inlanta Mortgage
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