When you are qualified for a mortgage, it is based on a certain monthly payment. The mortgage rate is assumed (as well as other figures such as taxes and hazard insurance). Mortgage rate changes affect PA home loan pre-approvals because it affects the principal and interest component of the monthly payment. It is useful for buyers to understand this since a fluctuation in interest rates will impact maximum purchase price.
Mortgage Rate Changes
Mortgage rates may fluctuate on a regular basis. Sometimes, they might even adjust more than once on the same day. As a borrower, you may not know what your specific mortgage rate will be until you find a property, have an estimated settlement date, and lock in your mortgage rate. Thus, there is some uncertainty, especially for price sensitive buyers. It is important to find out what mortgage rate was used to calculate the pre-approval and to keep your pre-approval up-to-date. If mortgage rates are constantly or dramatically moving, contact your loan officer prior to preparing a bid on a home to verify that you still qualify for the purchase price.
Mortgage Rate Changes Affect PA Home Loan Pre-approvals
Monthly payments normally include principal, interest, property taxes, hazard insurance, and mortgage insurance (if applicable). For this discussion, we will only look at the principal and interest portion. Assume that a borrower is pre-approved for a $300,000 property based on a thirty year mortgage, 3.5% down payment, and 5% mortgage rate. The principal and interest payment is approximately $1554. If the mortgage rate increases by 0.5%, that same buyer will then qualify for only $283,638. That is a significant in the list price, which may be a home with fewer amenities. Conversely, if mortgage rates decrease by 0.5%, the maximum purchase price elevates to $317,843. The table below demonstrates the affect of additional changes for this same buyer using a mortgage principal and interest payment of $1554:
| Mortgage Rate | Principal 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 |
Remaining An Educated Home Buyer
Be sure to ask your lender about the maximum payment amount for which you qualify. Using this information, you can better determine the feasibility of properties prior viewing them. Remember that there are different calculations for the total payment: mortgage rate, municipal taxes, property insurance, and mortgage insurance. If you wish to select a home near the qualification limit, then it will be essential to monitor mortgage rates. Your mortgage consultant and real estate representative can help with this analysis and provide other information on how mortgage rate changes affect PA home loan pre-approvals.