It’s true. It was bound to happen, but here it is and of course it is no fun at all. By now most people have heard from the news, their neighbors or the incessant stream of commercials that rates on mortgages have risen. By and large the increase has been .5-.75% on any given loan or program. The good news is that relative to where rates were or where they could be, they still aren’t that bad. Ask anyone over the age of 50 what the rate was when they bought their first home and that should make you feel a little better about this whole thing.
To give you an example of how the increase really affects you; the principal and interest payment on a $200,000 loan at 3.75% is $926.23 and the payment on the same loan amount at 4.75% is $1,043.29, a difference of $117.06 or about $4/day. Now if you are leasing and looking to buy, in a majority of the cases this still will be a better financial move to buy at 4.75% rather than keep throwing money into the black hole that is rent. The most common way this affects buyers, first time home buyers especially, is the amount of house you can now afford. One of the factors that affects qualifying for any loan is DTI (debt to income ratio). If the house payment is higher than it increases the “D” (debt), but if your “I” (income) is the same it may decrease the amount of house you could qualify for. To give yet another example (not sure if these are helpful or annoying), if your house payment (loan payment, insurance, taxes, etc.) is $1000 and the monthly payments on all other debt on your credit report is $500 your total debt monthly is $1500. If you have a job where you make $25/hour and work 40 hours a week that gives you $4,000 a month in qualifying income. To get the DTI you simply divide the D by the I or $1500/$4000= 37.5%. Now if the house payment turns out to be a total of $1117 due to rising interest rates then your DTI rises to 40.42%. For conventional loans 45% is the general rule of thumb to stay within, but there are ways around that if all the right factors are present. For FHA loans there is some leniency and with certain compensating factors you can get as high as 55%.
So yes, rates have risen, but such is the circle of life. Technically they have to come up some, so that one day I can blog that “RATES ARE FALLING!” Although even with the rise it is not quite time to panic. The pros of owning or buying a home still outweigh the alternative even with rates slightly higher than the lowest they have ever been in the history of the world, ever. Rates, much like gypsies, are always on the move so the information from yesterday may not hold true today. So let me know if you’d like to get an idea of where a rate might fall for a particular scenario and I’d be happy to give you some updated information.
Or you are always welcome to apply at www.mortgagemattbrown.com.
Matt Brown
