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Mortgage Rate Fluctuations Impact Pre-approval Amounts

Posted by Carrie Ciaburri on Wednesday, March 30th, 2016 at 11:21am.

When you get pre-approved for a mortgage, it is based on a particular recurring payment. The mortgage rate is estimated (as well as other amounts such as taxes and homeowners insurance). Mortgage rate fluctuations impact pre-approval amounts because it determines the principal and interest part of the total payment. It is useful for buyers to understand this because an increase or decrease in rates can impact homes that can be considered.

Mortgage Rate Fluctuations

Mortgage rates can adjust on a continual basis. At certain times, they may even adjust multiple times throughout the day. As a home buyer, you will not know what your particular mortgage rate is until you identify a home, have an estimated settlement date, and lock in the mortgage rate. Thus, there is some uncertainty, especially for price sensitive buyers. It is helpful to find out what mortgage rate was originally used to determine the pre-approval and to update the pre-approval. When mortgage rates are constantly or dramatically changing, speak to your lender before preparing an offer on a listing to confirm that you still qualify for the purchase price.

Mortgage Rate Fluctuations Impact Pre-approval Amounts

Mortgage payments normally include principal, interest, real estate taxes, homeowners insurance, and mortgage insurance (if applicable). For this example, we will only cover the principal and interest portion of the payment. Assume that a buyer is pre-approved for a $300,000 property based on a thirty year loan, 3.5% down payment, and 5% mortgage rate. The principal and interest payment is roughly $1554. If the mortgage rate increases by half a percent, that same home buyer will then qualify for only $283,638. That is a significant in the purchase price, which will be a smaller home. Conversely, if mortgage rates lower by 0.5%, the maximum price increases to $317,843. The figures below detail the affect of additional changes for this same buyer using a mortgage principal and interest payment of $1554:

Mortgage RateLoan AmountDown PaymentPurchase 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

Being An Educated Buyer

You should ask your loan officer about the total payment amount for which you qualify. From there, you can better determine the affordability of homes before visiting them. Remember that there are a few components to the total figure: mortgage rate, real estate taxes, homeowners insurance, and mortgage insurance. If you plan to select a home close to your qualification limit, then it will be essential to monitor mortgage rates. Your mortgage officer and real estate advisor can help with this analysis and offer other information on how mortgage rate fluctuations impact pre-approval amounts.

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