How can the FHA 30-year mortgage rates influence our home purchase?
Interest and Affordability
Depending on many factors such as your income levels, credit score, and value of the home you are looking to purchase, the interest rate could influence how much home you can afford. For example, you have about $1,050 per month – maximum – to pay for your mortgage. Now let’s look at some examples of how interest rates have a direct effect on how much home you can afford.
Let’s make the following assumptions about mortgage situation:
- You can afford $1,050 per month (including property taxes and insurance)
- You have a down payment of $10,000
- Your property insurance and taxes will be about $2,500 per year
- Minus your $2,500/year in insurance and taxes, you can afford to pay about $841 per month on your mortgage principal and interest
Now, let’s see how interest rates affect how much home you can afford:
Scenario #1: 3.5 percent interest
Paying 3.5 percent interest, you could afford a mortgage of about $187,434. With your down payment, that brings your upper limit home price to $197,434.
The calculation is easy to do with this free online payment calculator found on the United States Senate Federal Credit Union website of all places.
Scenario #2: 5.5 percent interest
Paying 5.5 percent interest, which seems like such a small increase, you could afford a mortgage of $148,235, for a home worth $158,235.
Scenario #3: 7.5 percent interest
Add two more percentage points in interest, and your mortgage limit drops to $120,373, or a home worth around $130,373.
So between 3.5 percent interest and 7.5 percent interest, which is really a huge leap in the world of mortgages, where things are calculated to 1/100 of a percent, you’ve lost over $67,000 of buying power.
The FHA secures loans made by private lenders. These loans are provided to Americans who have a low to middle income. This loan is available to those people who cannot afford a large down payment or higher interest rates. Interest rates for these loans are lower than the national average for a fixed rate loan. Individual banks determine the interest rates; therefore, the consumer should do research prior to accepting a loan at a particular bank. The consumer can receive a loan for as little as 3 percent down and also receive as much as 6 percent on closing costs. This means that the consumer can borrow up to 97 percent of the cost of the home.