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How Interest Rate Affects the Purchasing Power of Buying A Home

Posted By Paula Henry on Wednesday, August 24, 2011 5:44:00 AM | 19 Comments

If you locked in your interest rate on a home this past week, congratulations! The Indianapolis real estate market may not find better interest rates than we have right now.

The current mortgage rates make buying a home in Indianpolis Mortgage Interest Rates Indianapolis a better financial option than leasing.

A recent call from someone asking about a lease had me thinking about what the monthly cost of leasing vs. buying would be for the same home, if this person actually bought the home.I ran the numbers based on today's interest rates, as shown in the graph.

The Cost of Renting vs. Buying

In this particular case, they were looking at homes in Carmel which would sell for about $180,000. If they bought this home with an FHA loan, the monthly payment would be about $1249.00, including taxes and insurance. This amount includes the cost of mortgage insurance and would require about $6300.00 down payment plus closing costs.

The home leased for $1600.00, so buying the home would save them about $350.00 a month.

If they bought the home using a conventional loan with 20% down, the payments would be approximately $980.00. A monthly savings of $620.00 vs. leasing.

Downpayment Assistance for Home Buyers in Indianapolis

For those who don't have the down payment, Indiana Housing has a great down payment assistance program for home buyers in Indianapolis, called the Next Home program. Today's interest rates make it more affordable than ever to buy a home.

The Effect of Higher Interest Rates on Your Home

As interest rates rise, so does the monthly payment for your home. Here's a look at how the principal and interest of your loan will change as rates rise. The following graph is principal and interest only on a loan amount of $150,000.00.

Interest Rates Affect Payment

Additional Monthly Cost of Your House Payment

Besides the principal and interest on your loan, you will need to add taxes and insurance. Additionally, if you put down less than 20%, you will have property mortgage insurance (PMI or MIP). In the above scenario, assuming you are financing $150,000 on a purchase amount of $155,440. with an FHA loan at 4.5%, your payment would include the following amounts added to the principal and interest of $760.00.

Taxes - 1% of assessed value - approximately $129.00 a month
Insurance - Approximately $100.00 a month
MIP - approximately $144.00 a month.

This would make your monthly payment about $1133.00; saving about $460.00 a month compared to leasing.

Lenders will also figure in the cost of HOA fees when qualifying you for a loan payment.

Related Articles:

What is Mortgage Insurance

Down Payment Assistance

Buying a Home in Indianapolis

Discussion

#1 Posted by Jennifer | Panama City Homes at 8/29/2011 7:18 PM

Paula,

This is excellent insight for not only customers of Indianapolis but all over the country.

Buyers, renters and sellers should all pay close attention to your data as it affects them all closely in these tough economic times.

There hasn't been a real estate market where new buyers have had as much to gain as the current real estate market is offering.

Best of luck and continued success.

Jennifer

#2 Posted by Paula at 8/29/2011 7:36 PM

Jennifer -

I wish I could reach more people. Not only is it a great time to buy, Indianapolis has some awesome down payment assistance programs.

If people who can, don't buy now, they will be renting from those who do buy now. More importantly, they'll be paying more for a home in five years.

Paula

#3 Posted by noemi @ France Property Shop at 8/31/2011 5:07 PM

There are a lot of things that people do consider before buying a house. And I think interest rate has a big impact when purchasing. Real estate markets are giving a lot of offers which I think buyers just have to further check..

#4 Posted by Alex Ribble at 9/3/2011 0:17 PM

First off, what an awesome blog! From an SEO standpoint, you did an excellent job of the site's construction and optimization. Keep it up, this is the type of site that will continue to grow in value! Nice work!

#5 Posted by Paula at 9/3/2011 2:44 PM

Alex - Thanks! I appreciate that, especially from someone in the business of website design and SEO!

#6 Posted by Minerva @ Real Estate Park City at 9/6/2011 11:42 PM

Hi Paula, everyone is indeed saying that it is much better to buy than to rent nowadays. It's a good thing that Indianapolis has amazing down payment options because that's what people really need. :)

#7 Posted by Mitch Devine at 9/7/2011 8:09 AM

This is certainly a buyer's market right now. And with interest rates being kept artificially low they won't stay this way forever. My retired father recently sold his home needlessly (at the bottom of the market now) despite being urged to rent it out as an income property. His buyer got a great deal.

#8 Posted by Paula at 9/7/2011 8:14 AM

Minerva - These programs are great. There are a couple of programs now for both first time buyers and move up buyers who may not have equity from the home they sold.

#9 Posted by Paula at 9/7/2011 8:21 AM

Mitch - It seems we have been saying forever that interest rates can't stay this low, yet they persist below 6% and now below 5%. The game of artificially suppressed rates can not last.
I've recommended to clients it would be in their best interest to rent, but most do not want to be a landlord. The general population does not like risk.

#10 Posted by Alex Ribble at 9/7/2011 9:27 AM

...Just when you thought that interest rates would stay low forever... It's interesting how we in our Orange County bubble are content to complain about 6% when the reality is there's nowhere to go but up! Hold on tight, these next 2 years will be an interesting ride!

#11 Posted by Marla Schulman at 9/7/2011 9:35 AM

Thank you for the great information!

#12 Posted by Denise Sonnenberg at 9/7/2011 9:35 AM

Wouldn't it be nice if the government would just use all that stimulus money to give $50000 to people who wanted to invest in home buying. That would start the market up again.

#13 Posted by Sally K Witt, Social Media and Ministry at 9/7/2011 0:48 PM

Great information and well presented!

#14 Posted by Jay Feitlinger at 9/7/2011 4:02 PM

Paula, Great info! I agree with Jennifer as the post is quite helpful to anyone dealing with a mortgage.

#15 Posted by Debra Eckerling at 9/7/2011 4:14 PM

Such important information! Thanks for sharing it!

#16 Posted by Sukhraj Beasla at 9/7/2011 7:13 PM

I keep hearing it's better to buy vs rent and I'll get there someday. The dream is to have a house by Mission Viejo lake. One day, someday soon :)

Thanks for the info.

#17 Posted by Stacey Soleil at 9/7/2011 10:12 PM

Interesting info...the rates are crazy out here in CA as well. And we wonder why so many people are renting. ;)

#18 Posted by Debbie Miller at 9/7/2011 10:25 PM

Great post, thank you! I've been looking into buying lately and all this interest rate stuff is definitely applicable. The whole process is somewhat confusing and this post definitely conveys a lot of the details in a straightforward manner.

#19 Posted by Thea Bredie at 9/8/2011 9:50 AM

The figures and the government schemes are of course completely different in the UK, but the principle remains the same. Comparable payments over a comparable period with either bricks and mortar or nothing at the end.......but I realise that that is an oversimplified summary!