What's Your Buying Power?

What's Your Buying Power-Interest Rates vs Purchase Price

Most folks think that when they apply for a loan the Lender qualifies them for a certain total amount of money.  This is only partly true.  What you are being qualified for is the amount you are able to pay EACH MONTH, and this determines the total amount that the bank will lend you.

Let's suppose you want to borrow $200,000 to buy a new home.  You have the down payment and closing costs saved up and you contact the Lender for a loan.  When the Lender runs your credit report and checks your other documentation it is found that you can afford to repay $1200 per month.  If the current rate of interest is 6%, you're going to get your financing, because a 30-year, fixed-rate loan of $200,000 at 6% requires a payment of $1200 per month. 

But what happens if the current interest rate is 7%?  Payments on the same $200,000 loan at 7% are $1332 per month.  Since the bank doesn't think you can pay that, they will only approve you for $180,000.  You'll have to pass up your dream home and find something $20,000 less expensive.

On the other hand if the interest rates drop and you're looking at a 5.5% rate, your loan amount could increase by $10,000 to a loan of $210,000.  You can afford more house!  So to compare:

                                        $210,000 @ 5.5% is $1192.35 per month

                                        $200,000 @ 6%    is $1200.00 per month

                                        $190,000 @ 6.5% is $1200.92 per month

                                        $180,000 @ 7%    is $1197.54 per month

Would you rather pay $1200 a month for a $210,000 mortgage or $1200 a month for a $180,000 mortgage?  The first one gets you a $30,000 more expensive property for the SAME MONEY!

Prices are as low here at the beach as they will probably get.  It's not a "depressed" or "declining" market the way the primary market is.  If you're waiting for prices to go down another $20,000 or $30,000, chances are that will not happen.  And if interest rates go up you will have missed your best chance altogether. 

Smart buyers know that property values always increase in the long run.  When interest rates are low, they cut their best deal knowing that their value will eventually go up.  If you've been "on the fence" now is definitely the time to buy. Call me!