How Rising Interest Rates Can Impact Your Buying Power Right Now!

Here’s what we know about mortgage rates: Even though interest rates have risen in the past few weeks, they are still pretty low compared with a few years ago.  There are many things that impact the daily interest rates, and they do change daily.  The biggest impact is made by the Federal Reserve’s monetary policy, which is very complicated & a topic for another day!  See the bottom of this blog for a link to a recent article about the Fed’s monetary policy…

According to Freddie Mac, on July 11, 2013, the average interest rate on a 30-year, fixed-rate mortgage was 4.51 percent.  Care to take a guess at what rates were just 5 years ago???  In July 2008, rates were almost a full 2% higher at about 6.43%. Rates are still much lower today, but there’s really no crystal ball to tell how high they will actually go.

Average 30 year Mortgage Rates:

Source: http://www.freddiemac.com/pmms/pmms30.htm rate history.

 

Still not convinced that now is the time to buy or refinance?  Keep reading to understand what you’ll need to know to move forward…

Lenders will look at your debt to income ratio, or DTI (amount of debt vs. income).  Your front end ratio is your housing expense, or total mortgage payment.  Your back end ratio is this housing expense plus other recurring debt.  Things that are part of the back end ratio would be: credit cards, student loans, car payments, etc.  Things that would NOT be a part of your back end ratio would be: cable bills, phone bills and other non-recurring debt that you could easily get rid of.

Conventional loans typically require a front-end ratio of 28 percent and a back-end ratio of 36 percent. These numbers are a general guideline, and not a hard and fast rule. If your credit history is good, and you do not have a lot of debt, lenders might grant you larger mortgage loans than you would normally qualify for. Interest rates might be higher for those with a lower debt to income ratio.

Government insured loans like those provided through the FHA (Federal Housing Administration) and The Department of Veterans Affairs (VA) have looser loan guidelines. The FHA will accept borrowers with front-end DTI ratio of 29, and a back-end DTI ratio of 41. The VA will accept a 41 percent back-end DTI ratio.

Your debt to income ratio can be seriously affected by rising interest rates.  Let’s say you make $6,000 per month & you have $600 of recurring debt.  Your front end ratio would allow you to qualify for a payment of $1,680 on a conventional loan (28% x $6,000 = $1,680), while your back end ratio would allow you to qualify for$1,560 for a total payment (36% x $6,000 = $2,160 – $600 = $1,560).  At 4.5%, the payment on a conventional loan with 20% down on a sales price of $295,000 would be a loan amount of $236,000 and a payment of $1,572.90 with Principal, interest, taxes and insurance (PITI), assuming you are purchasing with Huntersville’s tax rate and assuming $60 per month homeowner’s insurance.  Going back to rates of just 2 years ago, this would reduce your buying power substantially.  At 6.5% that same loan would be $1,868.01 for a monthly PITI payment…  For the above buyer, your maximum sales price would go down to closer to $245,000, a reduction in buyer power of $50,000!

You might have to pay higher costs to get a lower rate…

There are 2 ways to get the best rates- first, you can have the best credit, lots of savings and just an outstanding overall credit profile.  The second way is to buy your rate down by paying points.

Points are a one-time charge paid to the lender to reduce the interest rate you pay over the life of your loan.  Think of this fee as a pre-paid interest charge to reduce the overall rate.

Chart of examples above for interest rates & how they impact buying power:

 

Sales   Price: $295,000 $245,000
Mortgage   Amount (20% down): $236,000 $196,000
4.5%   rate payment PITI: $1,572.90 $1,316.48
6.5%   rate payment PITI: $1,868.01 $1,562.23
Difference: $295.11 $245.75

The numbers speak for themselves; if you waited to purchase or refinance and mortgage rates went back up to the rates of just 2 years ago at 6.5 percent, you’ll face paying thousands more over the life of your loan with the higher payment, or have reduced buying power if you can’t qualify with the higher rates!

Also, keep in mind that you can’t lock your rate until you are about 60 days from closing typically with new construction, unless the lender offers extended rate locks (where you pay to lock your rate for up to 180 days in some cases, at a slightly higher rate).

Contact Kay Fisher and Associates today to take advantage of today’s low rates and prices while they are still low!

About the Federal Reserve’s monetary policy.

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