Daily Archives: January 24, 2009

By John Majanlahti

Most lenders dropped their 5 year mortgage rates to 4.49% this week, giving a much needed impetus to the start of the spring market.

How big a factor is this?

Consider that 5 year rates were in the 5.79% range through most of November, before dropping to 4.99% in mid December, and now to 4.49% this week. That’s a 1.30% drop in interest rates in less than two months!

Undoubtedly this will have a major impact on home purchase activity because affordability has increased significantly. Both buyers and vendors benefit.

If you are a buyer, your income can now buy more house. If you are a vendor, your listing can now attract a larger number of buyers.

Let’s illustrate with a simple example.

Consider a $375,000 purchase price, 10% down payment and a 90% high-ratio mortgage of $337,500, a client with average credit, using the maximum 35 year amortization. To qualify for the high-ratio mortgage, the November purchaser would have had to earn a gross income of about $77,000 to support the mortgage for the $375,000 purchase.

Now, with the drop in the 5 year interest rate to 4.49% this week, the same home is available to those with a total gross income of $67,000. That’s a $10,000 reduction from the November income!

Or put differently- In November, $67,000 of income meant purchase prices in the $315,000 to $320,000 range. Today the same income can view homes priced at $370,000to $375,000.

That’s 17% more home, which suddenly gives the purchaser $50,000 more room in house options!

And don’t forget. It pays to get pre-approved for mortgage financing. This will ensure that you get a 90 or a 120 day rate guarantee, while still allowing you to get lower rates, before closing.

If you have been on the sidelines waiting for an opportune moment, this is the time to contact your realtor and mortgage broker for specific advice relative to your situation.

John Majanlahti, MBA, AMP, is a mortgage broker with Alpha House Mortgage Corporation.