Saturday, June 7, 2014

How Much Home Can I Afford?

As I've written about many times, the first step towards home ownership is getting pre approved by a lender.  It's a simple process that defines the amount of home you can afford given your credit scores, debts, assets, employment, and income (among others).

One of the major factors in determining how much home you can afford is the current interest rate that you can obtain.  Right now, as you'll see in the video below, the average rate is about 4.14%.  This varies based upon a number of factors, including your qualifications, but is very influential in determining your eventual purchase price.

I've read on a number of occasions that a 1% variation in interest rate can influence your purchasing power by 10-12%.  This means that if you are pre approved to purchase a $200,000 home today, but sign another year lease because you want to save up more money, if interest rates jump up a percentage point by next year, there is a strong possibility that you'll only be able to afford a home at $180,000 or so.

The example above is merely an example.  There are many factors that go into this equation, but the possibility of interest rate hikes are a factor that very few potential buyers consider when making their decisions.


The bottom line is that nobody should purchase a home just to guard against possible interest rate hikes.  There is very little sense in attempting to predict the market, the best time to buy or sell is when you are ready to buy or sell.  But, if you are on the fence, don't forget to discuss affordability, interest rates, and market conditions with your lender so that you can make your decision an educated decision.

Take care,
Scott Morrison
scottmorrison@kw.com


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