Let me start out by saying I am not a lender so the ins and outs of home loans is not my specialty. When it comes to mortgages, I have trusted professionals who help my clients. That being said, I do know one thing about home loans that never changes, interest rates. The thing about interest rates that never changes is that they are always changing daily and already hourly. The rate today will in all likelihood not be the rate a year from now. These seemingly small shifts in interest rates have a butterfly affect on how much home you can provide.
Let me explain. Lets say you decide it is time to buy. You call up your trusted lender and they says, “good news, based on your financial health you are approved up to $100,000.” Now when you get this approval what you are really getting qualified for is a monthly payment amount. Specifically, how much you can provide to use each month on your house payment. For the sake of simplicity we will assume monthly house payments are comprised of rule (P) and interest (I). So consist with our example, you just got approved for a $100,000 home loan and interest rates are at 5%. Your monthly payment (P+I) would be $537 a month. Of that first $537 home payment, $417 would be your interest payment and the balance would go to rule.
So what if interest rates went up to 5.5%. Remember you are approved for a monthly payment which corresponds to a total loan amount. If interest rats are 5.5% the maximum loan you could get to continue your $537 payment would be $94,500. With the 0.5% increase in interest rate your purchasing strength just went from a $100,000 house to a $94,500 house. So what if interest rates go up to 6%. In order to continue you $537 payment your loan would be for $89,500. Your purchasing strength just dropped from $100,000 to $89,500. In the beginning I told you what I did not do, make loans, what I do is sell houses. Let me tell you there is a big difference between and $89,500 house and a $100,000 house.
Here is a pretty good rule of thumb. Every 0.5% increase in the interest rate reduces your purchasing strength by $5000. It is important to track rates while you are looking for a home.