Low Rates Arent Just for Refinancing
With mortgage rates at multi-year lows, refinancing is at a frenzy. The Mortgage Bankers Association reported that refinance applications accounted for 62.4% of mortgage applications for the week ending August 23, 2019. However, refinancing isn’t the only response to record low rates. Some may want to consider a new purchase instead.
As interest rates decrease, purchasing power increases. Admittedly, sales prices can also increase in some markets in response to lower interest rates. However, we will focus on the effect lower interest rates have on a buyer’s purchasing power.
Let’s assume a borrower qualifies for a principal and interest payment of $2,000 per month. Assuming a 30 year amortization, at an interest rate of 4.5%, the borrower would qualify for a loan amount of approximately $395,000. As rates drop, the maximum loan amount for the borrower increases. At a rate of 4.0%, the borrower would qualify for a loan amount of approximately $418,000 and at an interest rate of 3.5%, the borrower would qualify for a loan amount of approximately $445,000. In this scenario, a one percent decrease in interest rate increased the purchasing power of the borrower by approximately $50,000.
We have greatly oversimplified the analysis as down payment, credit score, taxes, insurance, and HOA fees will all impact the analysis. However, the impact of lower rates on purchasing power is clear. If you have been considering purchasing a new home, now may very well be the time to act while interest rates are at record lows. Contact your favorite loan officer at Momentum Loans today to discuss your options.