How the Interest Rate Affects Your Purchase Price
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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