Mortgage interest rates should be at the top of your list of concerns if you’re thinking of buying an apartment in NYC. But it can sometimes be a factor that’s overlooked by first time buyers.
Here’s why it matters.
The key reason why mortgage interest rates matter so much is the cost of borrowing. The lower your interest rate, the less expensive your loan will be over its lifetime. Let’s illustrate how much of an impact even 0.25 basis points can make.
For a $500,000 30 year mortgage, if your interest rate is 3%, then your monthly payment (excluding taxes and fees) would be $2108. However, if your interest rate is 3.25%, you’re looking at a monthly payment of $2,176. An extra $68 per month may not sound like much. But over the course of 5 years, it ends up being an extra $4,080. That’s not an insignificant amount of money!
If you recall from previous posts, your debt to income ratio (or “DTI”) is one of the two most important factors that a co-op board considers for buyers. A higher interest rate means a higher monthly mortgage. And a higher mortgage means a higher debt to income ratio.
Let’s use the numbers from the previous example to illustrate.
You’re considering a co-op that costs $500,000 and the monthly maintenance is $1000 per month. Your annual income is $150,000 per year which means your monthly income is roughly $12,500.
If your mortgage is $2108, then your DTI is 24.86% ($3108/$12,500).
But if your mortgage is $2176, then your DTI is 25.4% ($3176/$12,500). If you’re dealing with a particularly strict co-op board, that might be just enough of a difference to give them pause about approving your purchase.
Just like your debt to income ratio, a more expensive mortgage will also impact your post closing liquidity number.
Continuing with the previous numbers, if your mortgage costs $2108 and the building you’re considering wants 12 months of mortgage and maintenance ($1000) as their post closing liquidity requirement, then you’ll need to have at least $37,296 in post closing liquidity.
But if your mortgage costs $2176, then that number goes up to $38,112. In this case, that’s just shy of $1000 which isn’t too bad. But think about the differences you might see if your mortgage is 0.5 or 1.0 basis points higher.
If you’re not sure whether or not now is the time to buy, then use what’s happening with interest rates when considering the pros and cons. While interest rates should not be the deciding factor, they should help you determine if it makes sense to get out there ASAP or to wait a little bit.
Although you have no control over the market when it comes to interest rates, you can have some impact on an individual basis. This is where having great credit can help. An excellent credit history often means much better lending rates. So if you haven’t checked your credit in a bit, take a look to be sure you’re in the best position possible.
And if you want to discuss interest rates in more detail, then reach out to a mortgage professional.
Don’t know anyone? Then contact me! I have excellent connections at a wide variety of lending institutions.
Get my NYC First Time Home Buyer Guide FREE when you sign up for my monthly newsletter
By clicking Sign Up you're confirming that you agree with our Terms and Conditions.