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How Interest Rates and Your Income Determine Your Ability To Purchase a New Home

Wednesday, December 27, 2017   /   by Nick Miskin

How Interest Rates and Your Income Determine Your Ability To Purchase a New Home

     The predictions, although hazy despite the expertise of economists, are that interest rates will rise while incomes will remain relatively flat.  Bad news for home-buyers and home-sellers? Actually, not that bad at all.

     If you have been thinking about selling your smaller home and moving up to a larger home, current interest rates can work in your favor; and although all signs point to interest rates climbing in 2018, the historically low rates currently available won’t rise so significantly that buyers with a home to sell still can’t benefit.

     Here’s how.  Even if mortgage interest rates rose to as much as 5% annually, if your current smaller home sold for around $175,000 and you had about $30,000 left from the sale to use as a down payment and you used an FHA 3.5% down payment on a $275,000 home purchase with a loan on a $268,000, home your monthly payment including principle, interest, taxes, insurance and mortgage insurance would be around $1,860 per month.  Your down payment would only be $9,625.

                To qualify for a home loan, you would need a credit score of above 640. The higher the better as credit scores effect of your interest rate.  If two people were going to qualify together for that home loan, your two-income household combined gross income annually would only need to be around $102,000.

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     However, the year is starting out with interest rates closer to 4%.  The impact on household income and monthly payments are apparent.  Nearly $5,000 less annual income is required, with a monthly payment savings of $155 in mortgage payments (PITI).

 

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    Even buying a home at a 5% interest rate is a great deal. But considering the savings, selling your home now to move up to a larger home before rates start their upward climb makes home-buying in an already tight market just that much easier.