As a potential home buyer, you might be obsessing about interest rates—and that’s completely normal. You naturally want to get the best mortgage rate possible, but you shouldn’t have to agonize over something that’s not in your control. While it’s true that the higher the interest rate, the higher your payment will be, you also want to consider how that rate will actually affect your payment in real dollars and cents.
QUICK MORTGAGE TIP: Interest rates are not controlled by the bank; they’re actually controlled by the Mortgage-Backed Securities Market (MBS).
What Is The MBS?
Mortgage-backed securities are investments that are traded in real time on the bond market. MBS allows investors to benefit from the mortgage business (including monthly payments and the principal repayment) without actually having to offer the loan themselves.
To illustrate: think of your 401k or other invested equity assets. They will increase or decrease day over day, depending on a variety of economic and political factors. MBS are similarly traded daily on the open bond market, with FHA and VA lenders setting their rates based on these prices. That means that mortgage rates and loan fees will increase or decrease depending on current MBS market prices.
The bottom line? The MBS is responsible for driving interest rates higher or lower at any given time.
How Does This Affect Me?
The higher the interest rate, the larger your portion of principal interest in your housing payment will be. Want I want you to consider, however, is how little these interest fluctuations will actually affect your monthly payment.
For example: let’s say you’re borrowing $350,000. Since mortgage rates always increase or decrease by eights (or .125), a .125% increase on $350,000 is only $26. As long as you have your budget in place (check out the previous lesson if you haven’t already), these market fluctuations shouldn’t break the bank on your housing budget.
You’ll also only notice a small change even when it comes to purchase price. As you’re out in the field looking at houses with your realtor, you may find housing options that are outside of your original budget. In this case, let’s imagine another scenario.
Say that your dream home is priced at a non-negotiable amount of $360,000 but your budget was set at $350,000. How much extra, though, would that $10,000 really cost per month? If your interest rate was 4.5%, that $10,000 additional amount would only raise your monthly payment by $50. That’s a small price to pay when it comes to acquiring your dream home!
Understanding how interest rates work will allow you to make the best decision when it comes to your housing budget and the loan program you choose. While it’s great to set a budget for the price of a home, you’ll want to base your decision to make an offer around the total monthly payment and not just the total purchase price.
My advice: make sure you have someone who can pay attention to market prices and fluctuations that would affect your monthly housing payment.