Lower rates magnify borrowing power

You know that lenders look closely at your income and debt levels to determine how much they will lend you. High debts or low qualifying income can reduce your borrowing power. In addition, rising interest rates will slice your borrowing power because they increase your monthly payments per dollar borrowed. See these relationships in Table 3.7.

If, after looking at your income and bills, a lender says you can budget $900 a month for your mortgage payment (principal and interest), you could borrow $150,300 at 6 percent interest, but only $102,600 at 10 percent. The figures in Table 3.7 again reinforce this point: To increase borrowing power and slash interest costs, find lower rate financing. How do you do that? Here are eight possibilities that you will learn in this and later chapters.

  1. Consider an adjustable rate mortgage (ARM).
  2. Call state and local housing finance agencies to find mortgage bond money.
  3. Search for a lower-rate mortgage assumption or "subject to" purchase.
  4. Buy from a builder or developer who offers below-market interest rates.
  5. Weigh the benefit of paying points as a trade-off for a lower interest rate.
  6. Ask the seller to pay for an interest rate buydown.
  7. Use a wraparound or a blended rate mortgage.
  8. Use lower rate/costs seller financing.

Table 3.7 How Much Can You Borrow at Various Interest Rates and Monthly Payments?

Monthly Payment

Table 3.7 How Much Can You Borrow at Various Interest Rates and Monthly Payments?

Monthly Payment

(P&I, $)

4% ($)

6% ($)

8% ($)

10% ($)

12% ($)

400

83,800

66,800

54,500

45,600

38,900

600

125,800

100,200

81,700

68,400

58,300

750

157,200

125,200

102,200

85,500

72,900

900

188,700

150,300

122,600

102,600

87,500

1,000

209,600

166,900

136,200

114,000

97,200

1,250

262,100

208,600

170,300

142,500

121,500

1,500

319,100

250,400

204,400

171,000

148,800

2,000

425,466

333,783

272,465

227,943

198,350

Term = 30 years.

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