When you are pre-approved for a mortgage, it is based on a specific recurring payment. The interest rate is estimated (as well as other figures such as property taxes and insurance). Interest rate fluctuations impact MA pre-approval amounts since it impacts the principal and interest portion of the total payment. It is useful for home buyers to understand this since an increase or decrease in interest rates may affect home purchase options.
Interest Rate Fluctuations
Interest rates may change on a daily basis. At certain times, they can even adjust more than once within a single day. As a borrower, you will not know what your specific interest rate is until you find a property, know the closing date, and lock in your interest rate. This can create some uncertainty, particularly for price sensitive borrowers. It is important to know what estimated interest rate was used to calculate the pre-approval and to keep the pre-approval up-to-date. When interest rates are constantly or dramatically changing, speak to your loan officer before preparing a bid on a listing to verify that you are still qualified to purchase it.
Interest Rate Fluctuations Impact MA Pre-approval Amounts
Mortgage payments normally include principal, interest, municipal taxes, hazard insurance, and mortgage insurance (if applicable). For the purposes of this example, we will only cover the principal and interest portion. Assume that a borrower is pre-approved for a $300,000 purchase price based on a thirty year term, 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 qualifies for only $283,638. That is a significant in the purchase price, which may be a smaller home. On the other hand, if interest rates reduce by 0.5%, the price limit improves to $317,843. The table below details the affect of other increments for this same buyer based on a mortgage principal and interest payment of $1554:
|Interest Rate||Loan Amt||Down Payment||Sale Price|
Knowing Your Current Price Limit
You should ask your mortgage consultant regarding the total monthly payment amount for which you are pre-approved. Using this information, you can better gauge the feasibility of homes before making an offer. Keep in mind that there are different calculations for the total amount: interest rate, real estate taxes, property insurance, and mortgage insurance. If you intend to select a property close to your maximum pre-approval amount, then it will be essential to monitor interest rates. Your loan officer and real estate agent can help with these estimates and provide other information on how interest rate fluctuations impact MA pre-approval amounts.