Lower Interest Rates Equals More Home For The Money

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Today’s interest rates have been at record lows, which has in part been fueling a strong housing recovery in Arizona and several other areas of the country. People are finally jumping back into the market, sensing that there may never be a better time to lock in these kinds of interest rates.

While buyers know that low interest rates are beneficial, they are often unaware of just how much these rates may affect their ability to buy the home they want. Here is a hypothetical scenario to show the difference for a typical buyer:

Imagine that you find your ideal home in just the right part of town. It has the right amount of square footage, bedrooms, baths, etc. It is in a great neighborhood with an exceptional school district and even a swimming pool in the back yard. The only challenge is whether you will qualify for the purchase.

If the home was priced at $300,000 and you are bringing a 5% down payment ($15,000) plus closing costs to the closing, you need to qualify for financing of $285,000. However, whether you qualify will be determined by the amount of payment you can afford based on your overall monthly household income. In addition, the amount of the monthly mortgage payment will be determined by the current interest rate.

For example, if you calculate the monthly payment for a mortgage amount of $285,000 based on 4.5% interest and a 30-year term, your monthly payment (for principle and interest) is $1444.05. However, if you raise the interest rate by just 2 points to 6.5% (still a very low rate by historical standards), the monthly payment goes up to $1801.39. This $357.34 increase could be enough to disqualify you from purchasing the home you want.

Fortunately, as of mid-2013, interest rates are still close to their record lows. There is very little reason to believe they are going to stay this low. Therefore, if you have been thinking about becoming a homeowner or upgrading to a better home, there is no better time than the present to take action.

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