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How Might Changing Interest Rates Affect Home Buyers?

How Might Changing Interest Rates Affect Homebuyers

Do fluctuations in rates have a big impact on homebuyers?  Here’s the scoop on rates, affordability – and why now is the time to buy.

How affordability is affected by changing rates

As interest rates increase, the buying power of a borrower is lessened. Let’s say a homebuyer has $1,200 to spend on their monthly mortgage payment. If rates are 4 percent and the borrower secures a 30-year fixed conforming loan, their loan could total around $250,000. The monthly mortgage payment in these conditions would be $1,194.

Now let’s say rates rise 1 percentage point to 5 percent. With all the mortgage terms remaining equal, the borrower would pay $1,208 monthly for a loan totaling $225,000. That’s a difference of $25,000, or 10 percent, in buying power.

Many first-time buyers do not have a large down payment, and government and private lenders have changed their standards in order to accommodate these high earners with minimal savings. FHA loans can now be secured for as little as 3.5 percent down, while conventional (private) loans have a minimum of 3 percent down.

While these newer minimums have prompted many first-time buyers to enter the market, it also means these buyers are relying heavily on financing. And if rates increase slightly, they may need to look at adjusting their home buying budget a little.

 

The silver lining

The reality is that our local market is still a great place to buy!  Mortgage rates have risen slightly…but remain historically low.  During the last economic expansion from 2001-2007, mortgage rates hovered between 5% – 7%.  And in the 1990’s, rates were even higher, skirting between 7% – 9%.   Even with a slight uptick in rates over the past few months, it’s a great time -right now- to buy a home in Lexington and Central Kentucky!

Wondering What Current Rates Are?

Visit our partners over at HomeServices Lending to see current rates for multiple loan types. https://kentucky.homeserviceslending.com/rates

Do You Know The Different Types of Loans?

Check out our previous article, “Loan Types: Insights for Home Buyers”

 

Categories
Home Buying Tips Home Insights Newsletter Featurettes

Loan Types – Insights for Home Buyers

If you’re considering buying a home, having a knowledge of basic mortgage terminology can help prepare you for meeting with a mortgage consultant. Here are insights you can use to understand basic loan types and how they affect different types of borrowers.

 

Fixed-rate vs. adjustable-rate mortgages

One of the first choices you’ll make when applying for a loan is if you want to have a fixed-rate mortgage or an adjustable-rate mortgage.  A fixed-rate mortgage has an interest rate that does not change for the life of the loan, so it provides predictable monthly payments of principal and interest.

An adjustable-rate mortgage typically offers an initial introductory period with a low interest rate. Once this period is over, the interest rate adjusts periodically, based on the market index. The initial interest rate can sometimes be locked in for different periods, such as one, three, five, seven or ten years. Once the introductory period is over, the interest rate typically readjusts annually.

Government-backed loans vs. conventional loans

There are two primary types of government-backed loans: FHA loans and VHA loans.

FHA loans are insured by the Federal Housing Administration and are typically designed to meet the needs of first-time homebuyers with low or moderate incomes. FHA loans can be approved with a down payment as little as 3.5 percent. Because the agency is taking on more risk by insuring these loans, the borrower is expected to pay mortgage insurance and the property must be owner-occupied.

VA loans are backed by the Department of Veteran’s Affairs and they are guaranteed to qualified veterans and active-duty personnel and their spouses. VA loans can be approved with 100% financing, meaning VA borrowers are not required to put down a down payment. Unlike FHA loans, borrowers do not have to pay mortgage insurance on VA loans.

Want more information on FHA and VA loans? Visit: https://kentucky.homeserviceslending.com/pages/fha-and-va-loans

 

Conforming loans vs. jumbo loans

Fannie Mae and Freddie Mac are two government-owned institutions that buy and sell mortgages on the aftermarket. By selling the loans to “Fannie and Freddie,” lenders can free up their capital and return to issue more mortgages than if they had to personally back every loan that they approve.

If a loan meets the standards that Fannie and Freddie have set, then it is considered to be a “conforming loan.” More than 90 percent of loans that are issued in the U.S. are conforming loans.

One main standard for conforming loans is that the loan must be under a certain amount. While loan limits can vary by county, the conforming loan limit for all counties in Central Kentucky is currently $484,350. If a buyer asks to borrow more than $484,350 in Lexington or Central Kentucky, the loan is considered a “jumbo loan.”

Jumbo loans are considered to be riskier for the lender, so the bank will typically require a higher down payment. Additionally, the interest rate on a jumbo loan may be higher than if the same borrower applied for a conforming loan.

Want more info on Jumbo or Non-Conforming Loans? Visit: https://kentucky.homeserviceslending.com/pages/jumbo-financing

Need help financing a new home? Understanding the loan types is step one. Step two is getting pre-qualified or pre-approved, so you know where you stand. Reach out today to get connected with a HomeServices Lending expert who can help you, no strings attached!

Second Opinion Incentive

We’ll give you a $100 Target Gift Card just for coming to us and getting a second opinion on your pre-approval.

Step 1: present a copy of the loan estimate or pre-approval letter from a non-affiliated lender

Step2: Obtain a pre-approval letter from us, allowing you to compare offers

https://kentucky.homeserviceslending.com/uploads/pages/2nd_Opinion_0_All_03312019_v2.pdf

 

 

Categories
Home Buying Tips Home Insights Newsletter Featurettes

How Might Changing Interest Rates Affect Home Buyers?

How Might Changing Interest Rates Affect Homebuyers

Article Updated: April 2018
Do fluctuations in rates have a big impact on homebuyers?  Here’s the scoop on rates, affordability – and why now is the time to buy.

How affordability is affected by changing rates

As interest rates increase, the buying power of a borrower is lessened. Let’s say a homebuyer has $1,200 to spend on their monthly mortgage payment. If rates are 4 percent and the borrower secures a 30-year fixed conforming loan, their loan could total around $250,000. The monthly mortgage payment in these conditions would be $1,194.

Now let’s say rates rise 1 percentage point to 5 percent. With all the mortgage terms remaining equal, the borrower would pay $1,208 monthly for a loan totaling $225,000. That’s a difference of $25,000, or 10 percent, in buying power.

Many first-time buyers do not have a large down payment, and government and private lenders have changed their standards in order to accommodate these high earners with minimal savings. FHA loans can now be secured for as little as 3.5 percent down, while conventional (private) loans have a minimum of 3 percent down.

While these newer minimums have prompted many first-time buyers to enter the market, it also means these buyers are relying heavily on financing. And if rates increase slightly, they may need to look at adjusting their home buying budget a little.

 

The silver lining

The reality is that our local market is still a great place to buy!  Mortgage rates have risen slightly…but remain historically low.  During the last economic expansion from 2001-2007, mortgage rates hovered between 5% – 7%.  And in the 1990’s, rates were even higher, skirting between 7% – 9%.   Even with a slight uptick in rates over the past few months, it’s a great time -right now- to buy a home in Lexington and Central Kentucky!

Wondering What Current Rates Are?

Visit our partners over at HomeServices Lending to see current rates for multiple loan types. https://kentucky.homeserviceslending.com/rates

Do You Know The Different Types of Loans?

Check out our previous article, “Loan Types: Insights for Home Buyers“