When you are pre-approved for a home loan, it is based on a certain recurring payment.
The mortgage rate is assumed, in addition to other figures such as property taxes and property insurance.
Mortgage rate fluctuations affect mortgage pre-approvals because it impacts the principal and interest component of the monthly payment. It's important for homebuyers to understand how these changes can impact purchase price limits before purchasing a home.
Mortgage Rate Changes
Mortgage rates can fluctuate on a regular basis.
They may even change multiple times within a single day.
As a borrower, you will not know what your specific mortgage rate will be until you choose a home, have an estimated settlement date, and lock in the mortgage rate. This leaves room for uncertainty, especially for price-sensitive buyers.
It is important to know what estimated mortgage rate was originally used to calculate the pre-approval and to keep the pre-approval up-to-date.
During times when rates are constantly or dramatically changing, contact your lender before submitting an offer on a home so you can verify you're qualified at that purchase price.
Calculating Rate Changes
Monthly payments generally include principal, interest, municipal taxes, hazard insurance, and mortgage insurance (if applicable). For this illustration, we will only include the principal and interest portion of the payment.
Assume that a buyer qualifies for a $300,000 property based on a 30-year term, 3.5% down payment, and 5% mortgage rate. The principal and interest payment is roughly $1,554. If the mortgage rate rises by half a percent, that same buyer qualifies for only $283,638. That is a decrease of over $16,000 in the purchase price. Alternatively, if mortgage rates reduce by 0.5%, the price limit elevates to $317,843.
The figures below illustrate the effect of other increments for this same buyer based on a monthly principal and interest payment of $1,554:
|
Mortgage Rate |
Loan Amt |
Down Payment |
Purchase Price |
|
4.00% |
$325,523 |
$11,807 |
$337,330 |
|
4.25% |
$315,912 |
$11,458 |
$327,370 |
|
4.50% |
$306,719 |
$11,125 |
$317,843 |
|
4.75% |
$297,921 |
$10,805 |
$308,727 |
|
5.00% |
$289,500 |
$10,500 |
$300,000 |
|
5.25% |
$281,436 |
$10,208 |
$291,643 |
|
5.50% |
$273,711 |
$9,927 |
$283,638 |
|
5.75% |
$266,308 |
$9,659 |
$275,966 |
|
6.00% |
$259,211 |
$9,401 |
$268,612 |
Knowing Your True Price Limit
Be sure to ask your lender regarding the maximum monthly payment amount for your pre-approval. From there, you can better gauge the affordability of homes before viewing them.
Keep in mind that there are several variables to the total figure: mortgage rate, municipal taxes, hazard insurance and mortgage insurance. If you intend to select a home near your maximum pre-approval amount, then it will be essential to monitor mortgage rates.
Additionally, there are tax benefits to buying a home that you should also consider.
At Gehan Homes, our sales associates and preferred lender partners will assist you with these estimates and offer other details on how mortgage rate fluctuations impact mortgage pre-approvals. We believe happiness starts at home, and we’re here to help you find the perfect house for you and your family. Fill out the form below, and we'll get started.
