Can someone explain what .5% rate cut means to the mortgage rates to first time homebuyers?
In: Economics
Most homebuyers start with what they can afford as a monthly payment, then reverse engineer how much house they could afford.
In practical terms, assuming you have a 20% down payment saved (not that most people do, just for sake of easier math), and you could afford a mortgage payment of $1,580.
Yesterday with decent credit, you could get a mortgage at 6.5%, meaning you could afford to buy a $312,000 house on that payment.
In a few weeks when mortgage rates come down to follow the fed rate, assuming you can get 6% on a mortgage, you could now afford a $329,687 house. With a half percent rate drop in this case, you could afford to spend almost $20k more on a house.
However, since you can afford $20k more, so can everyone else, so home prices tend to go up after rate drops.
Bear in mind too, you’d also have to pay insurance and property taxes above this amount, which can be a lot of money.
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