Chicago area home buyers are used to shopping by home price, but the current mortgage rate environment calls for new thinking. In just a few months, mortgage interest rates moved from the mid-three percent range to over five percent. While rates are still cheap by historical standards, home buyers who are shopping with outdated pre-approvals are in for a rude awakening. 

For example, if you were approved for a $400,000 mortgage in 2021, your purchase power today is substantially less, thanks to higher rates. Here’s why: lenders are looking at the mortgage payment you can afford based on your income and debts. When rates were 3.5%, a 30-year mortgage for $400,000 would create a principal and interest payment of about $1,796.18.

But when you do the math on $400,000 with a rate of 5.5%, the principal and interest payment becomes $2,271.16. This is $474.98 more per month for the same house. And unless your home buying budget has “wiggle room” of about $500 a month, you’ll have to lower your price range to stay within a P&I payment of $1,796.18. That means your new, affordable home price range, assuming a rate of 5.5%, would be about $316,500. That’s a big reduction in purchase power! 

There are things you can do to boost your purchase power when rates are rising. You can increase your down payment, thereby reducing the amount you need to finance. You can pay off other debts to improve your debt-to-income ratio. You can improve your credit score to qualify for the best possible interest rates. You can increase your income. You can consider taking out an Adjustable Rate Mortgage (ARM) but these carry the risk of higher payments down the road. 

In the meantime, using an online mortgage amortization calculator allows you to run payment scenarios on different loan amounts and interest rates. For the most accurate guidance, talk to a reputable mortgage lender who will walk you through your options, and help you find the best financing strategy for your needs. (Remember too, that you’ll need to leave room for property taxes and homeowner’s insurance in your payment budget.)

Understanding the monthly mortgage payment you can afford – and being aware of how rate changes can affect it – is critically important. Banks are nervous these days, and rates have gone up, sideways and down a little during the past 3 weeks. Where rates will be a month from now is anybody’s guess. Unfortunately, you cannot lock in your interest rate until you have a home under contract, so be ready to roll with the punches while you search for your new Chicago area home

StartingPoint Realty helps first-time home buyers, and home sellers too!

StartingPoint Realty proudly serves first-time home buyers throughout the entire Chicago area. Get an introduction to home buying by attending our free home buying webinar! There’s no sales pressure and no obligation. We can also refer you to top-notch mortgage lenders in Chicagoland – just ask!

If you’re thinking about selling your Chicago area home, we’ve got qualified buyers at the ready! We’ll give you the information and guidance you need to make the most of your opportunities. Ask us for a free consultation about your home’s market value. There is no pressure to list your home, and no obligation. 

Always feel welcome to contact us with your Chicago real estate questions!

Ryan Gable Broker/CEO Starting Point Realty
Phone: 847.348.1154

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