A 1% change in mortgage rates can have a profound influence on the home price you can afford.
From December 2012 to Now
Back in December 21, 2012 the discount mortgage rate hovered around 2.89%. Since then, rates have slowly been inching up and by September 23, 2013, mortgage discount rates have increased to around 3.5%.
- At 2.89%, the monthly payment per $1,000 borrowed is $4.68.
- At 3.5%, the monthly payment per $1,000 borrowed is $4.99.
That's an increase of a mere 31 cents per $1,000, and hardly worth mentioning on the surface.
Yet 31 Cents Can Translate into Thousands
This fractional increase can have a dramatic negative effect on the amount of mortgage you qualify for.
Let's look at an example.
Let's say that you qualify for a mortgage payment of $936 per month based on your income.
- At 2.89% the mortgage amount you can afford is $200,000.
- At 3.5%, the mortgage amount you can afford within your qualifying income reduces to $187,600.
That's a difference of minus $12,400, and that can have a noticeable effect on the location and quality of home you purchase.
Let's take it one step further and increase to 3.89%.
What if, as predicted, the discount rate continues to inch up a full percentage point to 3.89%? The monthly payment per $1,000 borrowed now becomes $5.20. When compared to the $4.68 per $1,000, the 2.89% represents an increase of .52 cents per $1,000 per month. Again this does not seem like much.
Yet the Mortgage Amount Reduces by $20,000
At the qualifying monthly payment of $936, the amount of mortgage you can afford now reduces to $180,000. That's $20,000 less than the mortgage amount you qualified for when the rates were 1% lower back in December 31, 2012. That can have a severe impact on the location and condition of the home you can buy.
A Good Safeguard: Getting Pre-Approved
A buyer can guard against further deterioration of their affordability by obtaining a mortgage pre-approval. With pre-approval, lenders will hold the existing rate for a limited time. Depending on the mortgage company, if the rate goes up, the lender will honor the lower rate quoted at time of per-approval for 90 to 120 days. You will, however, need to purchase a home within that period of eligibility. Doing this sooner is a good idea, as some lenders are doing away with this practice.