# Buying A Home - Why do I care About Interest Rates?

By
Real Estate Agent with Coldwell Banker Preferred Properties

Yesterday the government decided to help out Fannie Mae and Freddie Mac which allowed the financial markets to feel "more secure", thus causing interest rates to go down.  With interest rates going lower, Now is a Great Time to Buy A Home in Hoover Alabama or anywhere for that matter!

Well you may be asking - What does that mean?

When you borrow money for a mortgage, you are getting a loan at the prevailing interest rate.  Let's say the going rate for today is 6%.  The two most common pay back periods are 15 years and 30 years.  The other variable used to figure your mortgage payment is the loan amount (which is the purchase price minus your down payment).

Let's say you found a house that costs \$150,000 and you were going to make a 5% downpayment (that is the amount you would pay in cash toward the house). Five percent would be \$7500. Subtract \$7500 from \$150,000 and you get \$142,500.  \$142,500 is your Loan Amount.

If you were to borrow \$142,500 for 30 years at an interest rate of 6%, the payment on your loan would be \$854.36 each month.

If interest rates dropped to 5.5%, on a \$142,500 loan for 30 years, the payment would be \$809.10 each month.

854.36 - 809.10 = \$45.26 less in your house payment EACH MONTH.  That's \$543 PER YEAR.

What could you DO with that money??  Well, you could use it to buy Christmas presents, or put it in savings for a new car, or it could allow you to qualify for a bigger house.

Since the amount of house you "qualify for" is based on what your monthly payment would be as a portion of your income, than the payment is the beginning point to determine the price of house you can afford.

Let's say you make \$17.60 per hour which equals \$36,615 per year. Let's also assume for this example that you have no debt because that is an additional step and we want to keep this simple.  Take your yearly salary and convert it to a monthly number (36,615/12=3051 per month). Next Multiply the monthly income number by 28% (3051 X .28 = 854.35). This is the amount of mortgage payment the lender will say you "qualify for".

In our example above, we saw that a \$142,500 loan at 6% for 30 years came out to \$854.36, so we can say that a person making \$36,615 per year can qualify to buy a \$150,000 house when the rate is 6%.  When we do the calculations based on 5.5%, we see that \$854.35 per month at 5.5% for 30 years will let you qualify for a loan amount of \$150,470.  With a downpayment of 5% (\$7525) like in the example above, your new house can cost as much as \$157,995. That is almost \$8,000 more house which can make a big difference!

So, either pay less each month for the house you want, or buy a more expensive house - either way it's a WIN.

If you've been thinking about Buying A House, now would be a good time to talk to a lender.  They will run a credit report on you and let you know what payment you qualify for and ultimately how much house you can afford.

If you have any questions about Buying A House in Hoover Alabama or the greater Birmingham area, I'd be happy to help, let me know at www.ToniBird.com.

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