Why Do Mortgage Rates Matter?

In real estate we are always talking about mortgage rates but you may be wondering why do incremental changes in a percentage really matter. We wanted to break down mortgage rates for you in order to better explain how capitalizing on a lower rate can help you afford a higher priced home. Let’s use a few example numbers to demonstrate. For instance, you may be shopping for a home around $400,000 and want to put 20% down. Our example interest rate to start will be 3.5%. For the sake of ease let’s assume there is a 1% property tax rate, which costs $4,000 per year and that your homeowners insurance will cost you $1,200 per year. With these numbers you would end up putting down $80,000 at closing with a monthly payment of $1910. This amount includes your homeowners insurance at $140 per month, taxes at $333 per month and your principal and interest at $1,437 per month.

Now let’s change only one variable, your interest rate. Let’s drop it to 3% and see what changes. Doing so drops your monthly payment $1,822 with principal and interest accounting for $1,349 (remember nothing else changed). Now let’s say that you were limited to a monthly payment of $1,910 from our original example. If the interest rate drops from 3.5% to 3% you go from being able to afford a home at $400,000 to $426,000. That is quite a large jump without having to increase your income or the amount of your monthly payment, and that is why mortgage rates matter. They have some of the largest impact on your purchasing power as a home buyer. Interest rates right now are at historic lows, which as demonstrated above means that you can afford more house now than you could have last year. Contact us today and find out how you can take advantage of this once in a lifetime opportunity.