By Betsy Falwell
It’s 2am, and instead of sleeping peacefully in my bed, I’m staring bleary-eyed at my laptop. When your house is on the market, you tend to become obsessive about a lot of things, mortgage rates chief among them. As a seller, you know that an increase in interest rates for home loans can dramatically affect who can – and can’t – afford to buy your home. As a buyer, you know any fluctuation in these rates impacts your purchasing power.
Today’s Mortgage Rates
This morning, I’m feeling lucky. Mortgage rates are down near historic lows, meaning that not only can more people qualify for a mortgage to buy my home, but that if it does sell in the near future, we’ll get the most bang for our buck when we upgrade our housing arrangements as well.
But during the time my house has been on the market – admittedly, it’s been too long for my tastes – I’ve seen many ups and downs when it comes to interest rates. I’ve spent many late nights with my favorite mortgage calculator, assessing what I can and can’t afford when it comes to home loans.
Who Can Buy My House?
Right now, our house is listed for $146,900. I’m wondering who exactly can afford to buy my house, so I turn to my trusty mortgage calculator for help. All mortgage calculators out there will ask you for some key stats on the property you want to buy, but the good ones always want to know:
- Size of your down payment (if it’s below 20%, expect to pay private mortgage insurance, or PMI, on that loan)
- Loan amount (this is the purchase price minus the down payment)
- Annual homeowners insurance premiums (this will be broken down to monthly payments)
- Annual property taxes (again, this will be prorated to monthly payments)
- Interest rate
- Loan term (most calculators will only calculate fixed home loans, but the length varies – typically
- between 10 and 30 year terms)
As I plug this information into the mortgage calculator based on my house, here’s what I’m looking at:
- A 20% down payment on my list price is equivalent to $29,380
- That makes the loan amount $117,520
- $600 a year for homeowners insurance
- $1880 a year for property taxes
- A 3.75% interest rate (this assumes the borrower/buyer has a good credit score)
- 30-year fixed rate term
And the result? A person buying my home under those terms would be looking at monthly housing expenses of $750.92. I’ve gotta say, that’s a deal – it’s about $200 a month less than I’m paying right now, thanks to my higher interest rate (I haven’t seen the point in refinancing, since I’m about to sell and wouldn’t recoup the closing costs). A potential buyer borrowing from a lender that allows a front-end debt-to-income ratio of 33 percent – meaning overall housing costs, including escrow, should amount to no more than a third of a buyer’s gross monthly income – would only have to bring
in $2,252.76 a month to qualify for a mortgage to buy my house. That represents a gross annual income (meaning the amount of money you make before taxes, medical insurance premiums, 401(k) contributions) for the buyer would only have to be $27,000 – well below the national median.
The Market Fluctuates
It’s amazing to note, though, how just a small fluctuation in the market can affect your buying power. Say, for example, that mortgage rates jumped up even a quarter of a point. That small change to the terms of this home loan would increase a buyer’s monthly housing costs $17 a month. Over the course of a year, a buyer would have to make an additional $600 a year just to make up for that quarter-percent increase.
How much home you can afford for your money changes based on other factors, too. Say you have a middling credit score – you’ll likely be looking at a higher interest rate. Or maybe you opt for a 20-year loan instead of a 30-year one – that increases your monthly payment. Or maybe you don’t have enough cash to put 20% down – you’ll be paying PMI until you reach 20% equity in your home.