Finally we hear some good news from the media machine: Mortgage rates drop! At the beginning of November, the average rate on a 30-year fixed in Texas was close to 6.5%. Today, a standard conventional purchase loan carries a ridiculous 5.5% or lower interest rate. So what does it really mean for home buyers in real dollars and cents? Let’s take a look.

Buyers can look at this rate improvement in two ways:

  • How much money will I save on the home I wanted?
  • How much more home can I now afford?

» How much money will I save on the home I wanted?

Just over 10% of your monthly payment. That’s correct - a rate drop from 6.5% to 5.5% translates into a 10% reduction in your monthly mortgage (principal & interest) obligation. Simply take your mortgage payment (principal and interest only – no taxes or insurance), and reduce it by 10.18% to determine your new payment amount.

To reduce the payment by 10.18%, multiply the original payment amount by 0.8982. See the example below:

Calculate the Monthly Payment Reduction for a $145,000 PurchaseIf you don’t know what your payment would have been, we can figure out the savings based on the price of the home. The monthly payment reduction equals $6.40 for every $10,000 financed. To do the math, simply divide your loan amount by 10,000, then multiply the result by 6.40.
texas mortgage rate trends

A few examples:

You’re buying a $100,000 home with 20% down
You’re buying a $225,000 home with 10% down:How did we determine this figure of $6.40 per month? At a 6.5% interest rate and a loan amount of $100,000, the monthly obligation for principal and interest equals $632. At 5.5%, the monthly obligation drops to $568 — a savings of $64/mo for every $100,000 financed. Divide everything by 10 to fine-tune by $10,000 increments.

Need some help with your scenario? Contact us here and we’ll do the math for you.

» How much more home can I now afford?

Looking to improve your home selection with this new and improved rate? You’ll be surprised to find what a simple interest rate change can mean in terms of home selection. For many home buyers, this can mean more than just upgraded flooring–you may be moving up in neighborhood selection instead. The rate drop from 6.5% to 5.5% translates to an 11.27% increase in available mortgage funds. To determine your price increase, simply multiply your original mortgage amount by 1.1127.

Examples:

You’re planning to finance $120,000 with a 6.5% interest rate:
You’re planning to finance $225,000 with a 6.5% interest rate:
Considering a $300,000 mortgage with that 6.5% rate?Keep in mind that property taxes and homeowner’s insurance increase along with your sales price — the calculations above apply only to the mortgage obligations. Good luck!
About the authorJohnny Schiro is the founder and managing broker of The Icon Realty Group, LLC — a North Houston real estate brokerage specializing in strategic home buying, efficient & profitable home selling, discounted new homes, and residential investment property in The Woodlands, Spring, Magnolia, Conroe, Tomball, and Cypress, Texas. Learn more about Johnny and the Icon family at http://www.houstonicon.com/About.

 

  • New Mortgage Amount = 300,000 * 1.1127
  • Look up to the $333,800 range with the same monthly payment.

 

  • New Mortgage Amount = 225,000 * 1.1127
  • At 5.5%, your finance amount jumps to $250,357.

 

  • New Mortgage Amount = 120,000 * 1.1127
  • With a 5.5% interest rate, you can finance $133,524 and keep the same monthly payment.

 

  • Total amount financed: $202,500
  • Monthly savings = ($202,500 / $10,000) * $6.40
  • You’re saving $129 per month.

 

  • Total amount financed: $80,000
  • Monthly savings = ($80,000 / $10,000) * $6.40
  • You’re saving $51 per month.

 

  • Purchase Price: $145,000
  • Down Payment: $20% ($29,000)
  • Amount Financed: $116,000
  • Payment at 6.5%: $733
  • New Payment at 5.5% = $733 * 0.8982
  • New Payment at 5.5% = $658

 

 

 

One Response to “Mortgage Rates Drop! What Does it Really Mean for Home Buyers?”

  1. Finest Real Estate Info » Blog Archive » North Houston Real Estate » Mortgage Rates Drop! What Does it … Says:
    December 16th, 2008 at 8:41 pm

    [...] unknown wrote an interesting post today onNorth Houston Real Estate » Mortgage Rates Drop! What Does it …Here’s a quick excerptMortgage rates drop by a full 1% since early November. What does that translate to for home buyers? Just about a 10% reduction in monthly mortgage obligation. Or for some buyers, it means they can afford to finance around 11% more home. [...]

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