The 1%/10% Rule Of Home Affordability

Now that mortgage interest rates are beginning to rise many prospective home owners think that real estate has become unaffordable!

Nothing could be further from the truth. All else being equal the only impact increases or decreases in interest rates have is on the monthly Principal and Interest (P&I) payment. Setting Credit Scores aside, Real estate investors like Fanny Mae, Freddie Mac, and FHA/VA (the Secondary Mortgage Market) establish guidelines to help mitigate risk of default on mortgage repayment. These are referred to as “debt to income ratios.”

The housing ratio is calculated by dividing the total monthly housing expense (PITI) by the total gross monthly income (GMI). PITI /GMI. The amount of your Real Estate Taxes and Insurance remain the same. And, the rise or fall in interest rates will influence the amount of Principal and Interest paid.

The 1/10 rule simply means that for every 1% increase in mortgage interest rates, your “affordable” P&I payment goes down 10%; and vise versa. Naturally, this is a general rule and the exact math will work out to be slightly different. Think of it this way: You’re shopping for a home listed at $250,000 when interest rates go up 1%. You should consider continuing to shop for a home, but one listed at about $225,000 ($250,000 x 90%). Say interest rates go down 1%, you can generally afford buying a home listed for approximately $275,000 ($250,000 x 110%).

If you’re selling a home please remember that this general rule applies to those who can/will be able to afford to buy. It should have some slight influence in where you set your sales price if you’re looking for a quick and competitive sales.

So other factors, often emotional factors, convince prospective home owners that they cannot/should not buy a home. As demonstrated above it is rarely changes in interest rates alone! Get to know an “Accredited Buyer’s Representative” (ABR) and enjoy the journey of finding a home you can make your own.

Let’s have a conversation (330-620-0219).

Or visit my website: ww.welistandsellhomes.com