Is the House Price More Important or the Interest Rate?
This is an interesting question. It’s almost akin to the classic “Which came first, the chicken or the egg?” Well, maybe not quite as common as the chicken vs. egg query but it is indeed important. When someone first begins searching for a home to buy certainly price is important but then again so are current market rates. Both have an impact but is one more important than the other?
First, let’s consider the price of the house. A list price on a home will be similar to homes that have recently sold in the area and crafted by a real estate agent who has performed some research and arrived at a price suitable to the owner. But really it’s less the price of the home but more about how much down payment the buyer has. If someone is qualified to borrow $200,000 but they’re looking at homes listed at $1 million then there needs to be a down payment of at least $800,000. For a better example, if there is a home listed at $400,000 and the buyers have a down payment of $40,000, the loan amount will be $360,000. It’s less the price of the home and more about the loan amount.
Second, the qualifying loan amount is also based upon the type of mortgage and the interest rate. If rates are at relative lows that increases someone’s buying power and when rates are higher it softens buying power. The term of the loan is also important. The longer the loan term the lower the monthly payment which then increases buying power. If rates on a longer term loan go up then buying power is reduced. Okay, now that we’ve defined exactly what we’re talking about which one is more important, the sales price or interest rate?
We say the interest rate if someone is making a 20% down payment or less. If buyers want to buy as big a house as they can should interest rates go up by more than say 0.25% it could affect the ability to qualify. Otherwise, the buyers would have to make a larger down payment to get to the approved loan amount. That’s how lenders issue loan approvals, a loan amount.
A loan amount approval is a combination of current rates, debt ratios and loan terms. An approval isn’t issued for a specific rate. You won’t hear a loan officer say, “Congratulations, you’re pre-approved for an interest rate of 4.50%!” That’s not the way it works. Conversely, a loan officer won’t say, “Congratulations, you’re pre-approved to buy a house listed at $450,000!”
It’s not the price of the house nor the interest rate that is critical but how much someone can qualify for. If someone has a down payment of $1 million dollars but only qualifies for a loan amount of $200,000 then they could buy a home listed at $1.2 million with that large of a down payment. Our takeaway? If you’re wondering which is more important, the price or the rate, you’re focused on the wrong dynamics. Concentrate on how much you can qualify for and start from there instead.
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