You probably instinctively realize that rising interest rates have an impact on home-ownership. The interest rate you pay will not only affect the price you pay for your mortgage each month but the amount of money you can borrow for the home loan itself. With interest rates expected to continue to rise in 2018, understanding this aspect of home buying more important than ever.
Interest Rates and Their Effect on Affordability
A mortgage payment is comprised of several different costs. Some loans require that housing necessities are impounded, in other words, you pay them along with your mortgage payment. These normally include taxes and insurance and in some cases, homeowner’s association dues. All mortgage payments include principal and interest as part of the total cost. Lenders use this payment to determine how much you can borrow for the home loan. Commonly, you can have 31-35% of your total monthly gross income as a loan payment. It follows that you want the principal portion of your home mortgage payment to be as high as it can be so you qualify for a more expensive home.
As interest rates increase the cost of of borrowing money, the size of the home loan for which you can qualify is reduced.
Higher interest rates means that a greater percentage of your mortgage payment goes to the cost of the loan vs the principal of the loan.
Interest rates are one of the biggest factors that affect your ability to finance a home purchase. Along with your credit score and employment history, the amount of interest you pay on the loan has a big impact on affordability. While you might not want to buy the most expensive home on the block, wouldn’t you like the option?
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