When you are qualified for a home loan, it is based on a specific monthly payment. The interest rate is estimated (as well as other figures such as property taxes and homeowners insurance). Interest rate fluctuations affect MA home loan pre-approvals because it impacts the principal and interest portion of the total payment. It is useful for buyers to understand this because an increase or decrease in rates can affect purchase price limits.
Interest Rate Fluctuations
Interest rates may change on a daily basis. At certain times, they can even do so many times on the same day. As a buyer, you will not know what your particular interest rate is until you identify a home, have an estimated settlement date, and lock in the interest rate. Thus, there is some uncertainty, particularly for price sensitive borrowers. It is useful to find out what interest rate was originally used to determine the pre-approval and to keep your pre-approval up-to-date. During times when interest rates are constantly or dramatically moving, speak to your loan officer before preparing an offer on a property to verify that you still qualify to purchase it.
Interest Rate Fluctuations Affect MA Home Loan Pre-approvals
Mortgage payments normally include principal, interest, property taxes, hazard insurance, and mortgage insurance (if the down payment is less than 20%). For the purposes of this example, we will only cover the principal and interest component. Assume that a buyer qualifies for a $300,000 property based on a thirty year home loan, 3.5% down payment, and 5% interest rate. The principal and interest portion of the payment is roughly $1554. If the interest rate increases by half a percent, that same home buyer will then qualify for only $283,638. That is a reduction of over $16,000 in the purchase price, which will be a smaller home. On the other hand, if interest rates reduce by 0.5%, the price limit improves to $317,843. The figures below illustrate the impact of other increments for this same buyer using a monthly principal and interest payment of $1554:
| Interest Rate | Loan Amount | Down Payment | Sale 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
You should ask your lender regarding the maximum payment amount for which you qualify. Using this information, you can better determine the feasibility of properties before making an offer. Keep in mind that there are several calculations for the total figure: interest rate, property taxes, property insurance, and mortgage insurance. If you plan to purchase a home close to the qualification limit, then it is very important to watch interest rates. Your loan consultant and real estate broker can assist you with these calculations and provide other information on how interest rate fluctuations affect MA home loan pre-approvals.