Why Interest Rates on Home Loan Mortgages are Falling

Recently the government took over mortgage giants Fannie Mae and Freddie Mac to prevent a further collapse of the housing market and a global fiasco in the financial markets. The move was deemed necessary as the value of the two companies had dropped more than 90% in the past year making foreign investors edgy and mortgage costs higher due to investor's demand for a higher return on their dollars invested. The move seems to have paid off this week as interest rates, and mortgage fees, are coming down. What does this mean to you if you are looking for a new home loan?

Lower Interest Rates Mean A Lower DTI

When determining how much of a mortgage borrowers can afford, lenders will enter the following information into a mortgage calculator:
  • Mortgage amount desired.
  • Interest rate charged on the mortgage amount.
  • Monthly property tax and insurance premiums.
  • Current monthly income.
  • Current other monthly debt such as car payments, credit cards, and other revolving credit.
When these items are placed into a mortgage calculator your lender will determine your debt to income ratio and tell you how much of a home loan you qualify for. Usually a lender would like to see a DTI of 35% or lower. Higher DTI's can still be eligible, sometimes up to 45%, however, you probably will pay a higher interest rate than a lower DTI will merit.

How Lower Interest Rates Equate to More Mortgage Affordability

A single borrower looking to buy a $350,000 condo with $70,000 down would have a mortgage amount of $280,000. If her income was $60,000 a year with no other debt, her DTI is 35.396% at an interest rate of 6.5%. With an over .5% drop in interest rates, her interest rate would be 6% and her DTI is now 33.575% which makes lenders more willing to lend. However, if our borrower would qualify at the higher DTI, she can now raise her mortgage amount to $295,000 @ 6% and have more purchasing power than when interest rates were at 6.5%.

Lower interest rates and lower costs for mortgages should help move the housing market forward and lenders are already seeing a renewed interest in home loan applications.

Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.

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