You Can Afford 8% More Home This Year
The run of low mortgage rates continues.
At the start of last year, 30-year fixed rate conventional mortgages averaged 4.52 percent nationwide. Today, according to Freddie Mac, those rates average 3.86% — a drop of sixty-six basis points (0.66%).
Conventional mortgage rates have been south of four percent for the majority of 2015, and FHA and VA mortgage rates have averaged even lower.
If you’re looking for cheap mortgage rates, now’s the time to get them. Low rates have boosted consumers’ home-buying capability, and they’ve shifted the “Buy or Rent?” question for many U.S. households.
It’s now cheaper to make mortgage payments than to pay rent in many U.S. cities.
Plus, with lenders reducing loan standards and with the general availability of low- and no-downpayment mortgage loans, it’s simpler than it’s been in a decade to get home loan-approved.
FHA loans now account for 1-in-4 home loans and, according to mortgage-software provider Ellie Mae, FHA purchase loans now average 96% .
VA home loans used for purchase now average 98% LTV.
Despite these high LTVs (also read: low downpayments), mortgage lenders have been approving more purchase loans than during any period this decade.
71% of all purchase loans were approved in August — the highest percentage since such data was tracked beginning in 2011.
Clearly, it’s an excellent time for buyers on the margin to consider homeownership. Mortgage rates are down, purchasing power is up, and lenders are sending more loans to settlement.
Mortgage Rates Affect Debt-To-Income Ratio
It’s among the most common questions home buyers ask, and is the starting point for nearly every home search in the nation.
It’s why there are so many online mortgage calculators available. Potential home buyers want to know what it will cost to purchase a home, and to own one. Understanding your costs helps to set your budget, which helps to set your price range.
However, the question of “How much home can I afford?” is slightly mis-worded and imperfect.
The question shouldn’t be “How much home can I afford?”, but “How much home can I afford given today's mortgage rates?“
The question of “How much home can I afford?” is answered using two pieces of information:
- Your total monthly income
- Your total monthly debt, including your home
Now, as individuals, we can’t do much to affect our monthly income short of changing jobs (which isn’t always easy) or by taking on a second job. That makes “income” a static figure.
Debt, however, is fluid. We can do a lot to affect our monthly debt. We can pay down credit cards to reduce our interest charges. We can downsize on our cars or refinance are auto-loan debt. We can spend less.
These are all good options.
However, when we buy a home and use a mortgage, we often double our monthly debts or more.
What Is Your Maximum Purchase Price?
So, how much debt is too much? Each household will have different idea.
To some families, a ratio of 20% may feel like “stretching” on the budget; whereas, to other families, a debt-to-income ratio of 35% may feel comfortable and within reason.
Author's Note: Mortgage lenders rarely approve home loans for households whose debt-to-income ratio exceed 43 percent.
Regardless, the monthly debt assumed by a homeowner is linked to more than just “the size of the mortgage”. The cost to finance that mortgage is key.
In the 1980s, when mortgage rates were in the teens, the cost of mortgaging a home was high. Today, with mortgage rates in the threes, the cost of mortgaging a home is low.
Every day, of course, that cost can change.
When mortgage rates rise, your monthly debts rise, too, which affects how much home you can afford. Conversely, when mortgage rates drop, your debts so, too, which also affects how much home you can afford.
So, the question “How much home can I afford?” is flawed and incomplete. It’s better to ask “How much home can I afford if I purchased a home today?”
Your maximum purchase price varies with the market.
1% Rate Change = 11% Purchasing Power Change
As mortgage rates change, so does your maximum purchasing power. This is why falling mortgage rates afford you “more home”; and rising mortgage rates afford you “less home”.
There’s a formula to help you figure it out.
At today’s mortgage rates, each 12.5 basis point (0.125%) change in rate affects your maximum home purchase price by close to 1.5 percent.
So, if you can afford a home for $400,000 today and, tomorrow, mortgage rates rise one-eighth of a percentage point, your maximum home purchase price falls to $394,000.
If rates fall another one-eighth of a percentage point the next day, your maximum home price now falls to $388,000.
This is why it’s important to pay attention to mortgage rates each day. How rates move affect the homes for which you can be approved to purchase.
For every 100 basis point (1.00%) change in rates, your maximum purchase price moves about 11%.
What Are Today’s Mortgage Rates?
Mortgage rates have dropped from a year ago. If you want to know “How much home you can afford?”, then, the answer will be higher than what it once was. And, that’s good.
Take a look at today’s real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.