Changes are coming to the mortgage arena.
If you had a short sale at least 2 years ago and have 20% down, you’ve been able to obtain a new mortgage. Fannie Mae is changing the rules (and Freddie Mac will likely follow) as of August 16th. Now you’ll need to wait 4 years after a short sale before you can obtain another mortgage. If you’re currently in the 2 year+ period and are buying a home, you’ll need to close by August 15th.
As you may have heard the economy is improving. The jobs reports have been great. As a result, the Feds are leaning toward reducing bond purchases in October. When this happens, it’s likely interest rates will increase. Even 1/2 percentage increase in interest rates will affect your buying power.
For every $100,000 that is mortgaged at 4.25%, you will pay approximately $492/month in principal and interest. When mortgage rates increase half a percent to 4.75%, your monthly payment increases $30 to $522. On a $100,000 mortgage that’s not significant, but on a $500,000 mortgage, that’s an increase of $150/month.
Let’s take this further.
With prices on the rise and multiple offers the norm, that $500,000 budget you may have may instead now be $477,000. Let me explain. You have $100,000 for a down payment. Your lender has approved you for up to a $500,000 home ($400,000 mortgage) at 4.25% interest, with a monthly payment of around $1,968 in principal and interest.
Interest rates are now 4.75%, a half percent increase. Your lender only approves you for the same $1,968/month payment. You can now only afford a $477,000 mortgage (with the same $100,000 down payment). Your buying power has decreased $23,000 or 6%.
For every half a percent that interest rates increase, your buying power decreases by approximately 6%. Your $800,000 buying power becomes $762,000. If interest rates continue on an upward trend, your buying power will continue to decrease.
Please feel free to contact me at 206-790-0081 or [email protected] for further explanation.