Home Purchase Price Limits Change with Interest Rates

If you are in the market to purchase a home, you probably have a pre-approval from a mortgage lender that lists a purchase price. You may think that the purchase price limit in that letter remains true throughout your home search,... after all, you are pre-approved. What you may not be aware of is that home purchase price limits change with interest rates. Rates are expected to increase in December, so this could make a difference in your purchase plans. Here's why.

Pre-approvals Are Based on Assumed Interest Rates

When preparing your pre-approval, lenders use the then current interest rate. They also estimate taxes and homeowners insurance to calculate a monthly payment for which you qualify. However, interest rates are constantly changing and property taxes can vary from house to house. Therefore, the price listed in your pre-approval is merely an estimate,... and is subject to change.

How Much Home Purchase Price Limits Change with Interest Rates

When interest rates go up, you will be pre-approved for a lower purchase price limit, and vice versa. Let's take a look at a few examples to illustrate just how much home purchase price limits change with interest rates.

Let's assume you're approved for a $400,000 purchase price with 5% down payment. Your loan amount would be $380,000. At 3.75% interest rate, your monthly payment (for just P&I - principal and interest) would be $1,759.84.

If rates increase one-half percent to 4.25%, your monthly P&I would be $109.53 more at $1,869.37. If you were already maxed out on your pre-approval, then that hundred dollars would make a big difference. In order to keep your monthly payment the same, you would need to purchase a home for $377,000. Therefore, that 0.5% increase in interest rate reduces your purchase price limit by $23,000!

Importance of Staying Up to Date

If you are actively looking for a home to purchase, you would need to know this critical information! Otherwise, you might make an offer on a $400,000 home, only to find out that you no longer can afford that price. Stay up to date by first knowing what interest rate your lender used when calculating your pre-approval and if you are maxed out at a particular monthly payment.

Unfortunately, you cannot officially lock in an interest rate until you have a home and closing date in mind. Remain in touch with your lender and know about any major interest rate changes, especially before submitting an offer on a home. Communicating with your lender and understanding that home purchase price limits change with interest rates will ensure that you are making educated and accurate home purchase decisions.

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