When buying a house, your most important financial concerns are likely the list price and the down payment. But these are only part of the financial equation and far from the only expenses. Once you close, there will be other numbers to be concerned about. And chief among these will be your mortgage interest rate and how it will impact your finances. Read on to find out how much interest rates matter when buying a house in New Jersey.
Why Interest Rates Matter
In short, your mortgage interest rate directly impacts your monthly mortgage payment and the total amount you wind up paying for your home. So let’s see why and how interest rates matter for buying a home in New Jersey.
“Suppose,” for example, “you started the home search process when interest rates were 4%. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000 – the amount you would be mortgaging after a 20% down payment and your closing costs. Your monthly payment would be $382.”
If, however, you wait for interests to go down, that savings may very likely be offset by rising prices. A “condo in the neighborhood you want now costs $120,000. You put down 20% plus closing costs, and you are left with a mortgage of $96,000. Your monthly payment on a 30-year mortgage is $355. Your payment dropped by [only] $27.”
Interest rates matter so much for those buying a house because “mortgage rates affect more than just the interest you’ll pay over the life of your loan. Your fixed rate also plays a major role in determining your ‘home buying power’ – meaning how much home you can afford.”
How Interest Rates Affect Your Buying Power
So let’s see how interest rates impact your buying power when buying a house in New Jersey . . .
Interest rates hit near historic lows in August and September of 2019. “September’s low reached 3.5% for a 30-year, fixed-rate mortgage. At that rate, it would be possible to afford a home valued at more than $400,000 and pay only about $1,500 per month (not including taxes, insurance, or HOA fees). A year [before] when rates were over 4.6%, the same monthly payment might have gotten you a home price less than $375,000.”
“In fact,” according to industry experts, “with each 0.125% change in mortgage rates, your buying power can increase or decrease.” That’s why with interest rates still low but rising, they also maintain that now is a good time to buy before rates go up even more. You can consult a New Jersey agent at 855-966-DEAL for some guidance on local markets and the best time to buy.
An Example for Buying a House
So now let’s look at an illustrative example to see how interest rates matter when buying a house.
A mere 1% drop in interest rates could save you $30,000. “A 1% point drop in rates – such as from 4.5% to 3.5% – leads to a monthly savings of $167 on a $200,000 mortgage. Consider this example . . .
“A home buyer named Steve has a monthly gross income of $5,000 and an expected total monthly debt of $2,250. His debt-to-income ratio is 45%. Steve takes out a 30-year fixed loan of $250,000. At 4% interest, his monthly payment for principal, interest, taxes, and insurance . . . would be $1,193.”
But what if Steve was able to get a mortgage interest rate of 3.5% instead?
“That rate decrease of a half percent increases Steve’s purchasing power by $15,000; that assumes $1,122 is the maximum payment he can afford . . . If Steve’s rate was 3%, it would lower his monthly payment to the amazingly low sum of $1,051. That boosts his buying power by $30,000.
What It All Means
As you know, interest rates directly affect your required monthly mortgage payment when buying a house. But did you know with your early mortgage payments, most of the payment goes toward interest alone and very little toward the principal?
“Early on in a typical 30-year mortgage, more than 95% of a buyer’s monthly payment goes toward interest. The lower the mortgage rate, the lower the amount of interest that needs to be paid. And the lower the monthly payment, the more affordable the home is on a month-to-month basis.”
Here’s what it all boils down to: “[I]f you can afford a certain monthly payment based on your income, you can afford to take out a larger mortgage if interest rates are lower.”
The Final Step Toward Buying a House
Interest rates are important for anyone buying a house. The unfortunate fact, though, is that interest rates are rising from the near historic lows of just a short time ago. And that means that finding a home priced right is becoming even more important. An experienced local agent will be your best bet for finding a house priced appropriately for your financial situation. So if you’re planning on buying a house in New Jersey, be sure to contact us today at 855-966-DEAL.