Hilde's Mortgage Blog

Lately rates have been dropping and could be considered having reached an historic low. It remains to be seen if rates will drop further and how much longer they’ll stay at currently levels.

One great aspect of lower rates is the impact it has on the purchasing power of a prospective buyer.

Let’s say a buyer has an income of $4,000 per months and other monthly debts of $500 per month. Let’s also assume that their underwriting risk profile allows for a total debt to income ratio of about 40%. A change of the interest rate of one percent would equate qualifying for $16,000 more of a loan. If, for simplicity purposes, we assume a down payment of 20% and a loan of 80% of purchase price, we are looking at the difference of a purchase price of $190,000 versus $210,000. In this example a 1 percent drop in the interest rate results in purchase power increase of $20,000 and loan amount increase of $16,000.

There is speculation that rates may drop further. When deciding when to buy your home you need to factor in the risk that the perfect home you found today won’t be available when the rates have reached the low point you are waiting for. However, if you do buy now and rates still drop significantly, you can always look at refinancing that initial loan later.