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June 15 2022

How Interest Rates Affect Home Loan Borrow Amount

As interest rates rise, monthly mortgage payments change just as drastically. Typically home prices tend to lower as well because the number of previous buyers no longer qualify to purchase. Home values may, however, take some time to change direction. In the video I give two examples of how rising interest rates affect the purchase price of a home.

Comparing interest Rate Hikes in Colorado Springs

Today is June 14th and just one week ago VA interest rates could be obtained in the 4% range, which you can check out in Last Week’s Episode. $350,000 is an affordable loan amount for an average home here in Colorado Springs, CO, so I placed a 4% interest rate on a home purchase and included $200 for Taxes and $200 for Homeowner’s Insurance. The total monthly PITI (Principle Interest Taxes & Insurance) equates to $2,2400/mo. Using the same scenario, a 7% interest rate increases that monthly payment to $2,900/mo. In order to cut the monthly mortgage of a 7% interest rate down to $2,240/mo, the loan amount must reduce to $250,000. This $100,000 difference can be secured through building up one’s own equity or savings. For someone obtaining 100% financing that hopes to wait out the market change (which already began), they would have to see home prices drop $100,000 to obtain a mortgage payment equitable to the earlier rate.

Examining Interest Rate Hikes on a $600,000 Loan

I also used a $600,000 loan example to demonstrate what happens. Here’s the effect of rising interest rates on a $600,000 loan:

  • 4% ~ $3,440/mo
  • 5% ~ $3,800/mo
  • 6% ~ $4,170/mo
  • 7% ~ $4,560/mo

A 7% interest rate would need to cut the purchase price down to $430,000 in order to roughly obtain a $3,440/mo mortgage payment.

Calculating Interest Rate Hikes against Home Purchase Prices

These are some significant price gaps that should be calculated wisely. When planning, there has to be enough to manage either saving for the long haul to buy in the future, or knowing one’s budget enough to purchase before being priced out of existing home options. 

Tools to Help in Home Purchase Decisions

In either case, I have tools to help identify where you are currently at so you can make a wise buying decision or plan to save for a future purchase. There’s also other helpful videos on the website and resource downloads that give insight into the mortgage industry. Take a peek around the website or give me a call and I would love to chat and help you out!

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Funding Juicy Solutions LLC

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