Mortgage Rate Changes Affect Southern California Home Affordability

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When you are pre-approved for a home loan, it is based on a certain recurring payment. The mortgage rate is assumed (in addition to other figures such as property taxes and property insurance). Mortgage rate changes affect Southern California home affordability because it affects the principal and interest component of the monthly payment. It is useful for buyers to understand this because a change in interest rates may affect properties that can be considered.

Mortgage Rate Changes

Mortgage rates can adjust on a daily basis. At certain times, they might even do so several times within a single day. As a borrower, you may not know what your specific mortgage rate is until you find a property, have an estimated settlement date, and lock in the mortgage rate. This can create some uncertainty, particularly for price sensitive buyers. It is helpful to find out what mortgage rate was originally used to determine your pre-approval and to update the pre-approval. During times when mortgage rates are constantly or dramatically moving, contact your lender before submitting an offer on a home to confirm that you still qualify for the purchase price.

Mortgage Rate Changes Affect Southern California Home Affordability

Monthly payments normally include principal, interest, municipal taxes, property insurance, and mortgage insurance (if applicable). For this illustration, we will only look at the principal and interest component of the payment. Assume that a home buyer is pre-approved for a $300,000 purchase price based on a 30-year mortgage, 3.5% down payment, and 5% mortgage rate. The principal and interest portion of the payment is approximately $1554. If the mortgage rate rises by 0.5%, that same buyer will then qualify for only $283,638. That is a decrease of over $16,000 in the purchase price, which will be a property with different features. Conversely, if mortgage rates reduce by 0.5%, the maximum price elevates to $317,843. The figures below demonstrate the affect of additional changes for this same buyer using a monthly principal and interest payment of $1554:

Mortgage Rate Loan Amt Down Payment Sale Price
4.00% $325,523 $11,807 $337,330
4.25% $315,912 $11,458 $327,370
4.50% $306,719 $11,125 $317,843
4.75% $297,921 $10,805 $308,727
5.00% $289,500 $10,500 $300,000
5.25% $281,436 $10,208 $291,643
5.50% $273,711 $9,927 $283,638
5.75% $266,308 $9,659 $275,966
6.00% $259,211 $9,401 $268,612

Remaining Informed

Be sure to ask your lender regarding the maximum monthly payment amount for which you are pre-approved. From there, you can better determine the feasibility of properties before viewing them. Remember that there are several variables to the total payment: mortgage rate, property taxes, property insurance, and mortgage insurance. If you intend to purchase a home close to the maximum pre-approval amount, then it will be essential to watch mortgage rates. Your mortgage officer and real estate representative can assist you with this analysis and offer other information on how mortgage rate changes affect Southern California home affordability.