How Higher Interest Rates Affect

Higher interest rates and how they affect home buying that’s Shana Acquisto, she’s a luxury real estate broker. She doesn’t talk about interest rates, how it affects how much you can actually buy.

I’m going to give the other side of the coin and tell you the one most important thing that is way more important than the interest rate. Well, I think yeah.

So if you guys one thing I want to tell you before we do this is you, there’s a lot of avenues to get information, real estate information out there. I really like to go to the Texas A&M Research Center for that information. Personally, I find it, you know, across the board the most accurate in assessments. So we’re going to pull that over and you guys can see this. It’s called the .recenter.tamu.edu/ OK?

So you guys have it and can reference this.

This was, you know, this was my go to source way before our kids went to. So, OK. So anyway, so there’s a lot of talk about, you know, being in such a competitive market that buyers are like, you know why I’m just going to wait till next year? Ok, well, the interest rates are going to go up.

It’s a given, right? So how does that affect the buyers? You know, if they wait. So I think a good rule of thumb, what I have understood it to be is for every one percent interest rate increase, it affects 10 percent of your buying power. So on a five hundred thousand home, you know, if it goes up, then you’re looking at four fifty, not five hundred.

Right. If the rate moves up, one percentage point, right?

So that just gives you a good basis that you can now talk to your clients and kind of give them a metric of what that would be. But, you know, that’s pretty substantial in this market, especially for first time homebuyers now.

Does it affect, you know, the luxury market? Probably not as much, but it is going to really hurt people in this that are already at a high price point and pushing their limits in and around the five hundred thousand mark.

Mm hmm. So, all right. So that’s the difference. It’s one percent increase affects it by 10 percent on your total borrowing power.

Yeah. And I promised you one point to counter that one that I feel is more important. All right. Ok. And that point is how you set your loan up in your total borrowing power as a combined entity of a household.

Ok, this is how we do it. So the way that works is you have a DTI or debt to income ratio. Ok. And what happens is you can borrow a certain amount of money from the bank based on how much you earn as a combined household income. We’re going to give an example and say that Shauna earns five times what I earn on an annual basis.

So congratulations. And in that scenario, if we both sign for the home and obligate ourselves, that debt counts one hundred percent on my side for the monthly payment and one hundred percent on your side for your monthly payment. Ok.

So in a simple example, if the monthly payment on the place that we were purchasing was two thousand a month, yep, it would count two thousand against my debt on a monthly basis and two thousand dollars against yours, not one thousand in one thousand for a total of two or if I earned 20 percent of what Chana earned, it wouldn’t count in that ratio.

It’s full, so it effectively halves your borrowing power as a combined entity. So the way that I like to do this and this is a point is if I would qualify for the mortgage in just my name, yeah, then we would put that debt or liability on my side. And Shana now would have free borrowing capacity.

To do whatever she wants to on that side. And I would strongly recommend that you get approved and you close the loans with the lowest common qualified borrower that is approved to still get the best rate and term right as you possibly can, and only obligate yourself to one borrower by doing to you have a problem in the future.

So if I could be approved for it on my own in this particular situation, if something else came up. Then China would be able to do that now if we put it in Shauna’s name only. And I could be approved. If all of a sudden what happens is, let’s say that we found another property we wanted to buy and buy a second place that we fall in love.

But it affects your credit, your overall credit score, your overall moral liability on your credit for two people so you can qualify single now. Some people might need the combined income to be able to qualify for a price that would work in a home purchase.

So that’s a difference. And that’s what I was trying to go over here in this. The second example is if I put it just in China’s name because of that, and then later I was at the max what I could get for home one and I maxed that out and I found a home that we liked better and we want to buy a second place in that scenario.

I wouldn’t qualify for it because we put it in the wrong name to start with for the first one.

Yeah. So anyways, put it in the least qualified but best borrower possible with the lowest common qualifying. Yes, that you possibly can. Yeah. And what that does is it allows you to borrow twice as much. So you’re talking about a 10 percent difference. I’m talking about a 50 percent difference.

Absolutely. So that’s true. That’s that’s my point. Good job. And it’s irrelevant of interest rates. It’s setting that one thing up. So if you kind of understand that, then you’ll be really well off. It’s often not explained to a lot of borrowers.

It’s not explained. And I hear this a lot of know that’s my house, too. I want to be, you know, I’m going to be, this is going to be my house, too. Well, it will be. Ok, so we’re in Texas. It’s a community property. State your houses with your partner.

So for the equity portion or the equity, there’s two sides. There’s debt and equity. There’s like a positive and negative side, right, like both sides. So the mortgage would be just in my name and that’s the opportunity to repay or the obligation to repay it. But you would have no obligation to repay it, but you would have just the upside or the positive side by signing on the deal.

Right now, it’s the upside. So you could also go the other way it could that we’ve seen some clients.

So just understand the difference in that one, right? There is a great point for any of your clients to understand. And I think that’s going to separate you in understanding this because all these TNT topics really flow together. When you talk about somebody saying this fact, if you have like, I see your fact and I raise you times five,

Is that a poker plug, right? Ah, great point. That’s awesome. All right. Let us know if you have any questions on that. I think it’s, you know, it’s a hot topic right now and something you should be able to explain to your clients.

Episode Links

Higher interest rates , Texas A&M Research Center, first time homebuyers, debt to income , Mike Acquisto , Shana Acquisto , TNT 

Episode Recorded Live on YouTube 03.01.22

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