In one of the National Association of REALTORS® most recent “Consumer Guide” series, the topic of navigating mortgage interest rate shifts was covered. The interest rate on your mortgage affects the price range you can comfortably afford. Approaching the issue with knowledge—including an understanding of how rate changes impact your monthly payment—can help keep your home purchase on track.
Individual lenders set interest rates based on economic conditions, their risk tolerance and other factors, including the yield on 10-year Treasury bonds and the price of mortgage-backed securities. Your credit score, debt-to-income ratio and down payment amount also impact your rate.
Fixed-rate mortgages keep the same rate during the life of the loan. Adjustable-rate mortgages (ARMs) may offer lower initial payments (usually for five or seven years), but your rate could rise later based on market conditions. With an ARM you get early money savings for a share of the interest-rate risk down the road.
Typically, your monthly payment includes a portion of the principal loan amount, interest, property taxes and homeowners insurance. If your down payment is less than 20% of the purchase price, it can also include private mortgage insurance. Most experts say your monthly housing costs should be about 25% of your net monthly income, but lenders may approve a higher percentage if you have good credit, a large down payment or high cash reserves.
Higher interest rates affect your monthly mortgage payment, so it in turn affects your purchasing power. With a 20% down payment on a $400,000 home, the monthly payment for a 6% interest rate on a 30-year fixed mortgage would be $1,919. The payment would be $2,023 at 6.5% interest and $2,129 at 7% interest. So, a 1% increase in the mortgage interest rate would raise the monthly payment by $210. Use an online mortgage calculator to see how changes in rates and down payments impact your monthly payment.
Lauren Bunting is a Broker with Keller Williams Realty of Delmarva in Ocean City, Maryland.
