The “One Will Cost You 11” Formula

As we are coming out of an era when mortgage rates reached an all time low, as consumers, it is prudent, without the saturation of rock bottom rates, to seek out ways in which we will still be able to good deals on mortgages.

Consider employing a simple formula called the “one will cost you 11.” This is a phrase used to explain how one percentage point will require an income increase of 11 percent in order to bridge the gap. Therefore, if you make 50,000 per year at your job, and your are just barely covering the needs of your loan that has a 5.5 percent associated rate; even if all other factors remained constant, i.e. loan amount, initial deposit, credit background check, debt versus income percentage, you would still need to make an additional $5,000 (in total $55, 000) in order to cover a one percent interest rate increase from 5.5 to 6.5 percent

Essentially, this formula holds true for both fixed rate and adjustable plans. When mortgage rates are low, home prices are more reasonable. When interest rates increase, home buyers have fewer options as they are no longer able to get as much for their money. Yet, economic changes do not have been foreseen as a complete barrier to home ownership. Rather, the opposite, as there are still a plethora of routes one can to take in the process of affording their dream home.

Even as rates head upwards, consumers’ ability to demonstrate their power when shopping for mortgages will still be a significant factor in the mortgage lending industry. However, it is important for potential homebuyers to take into consideration all the loan options available to them. On account of the new rules that will apply as interest rates increase, borrowers are encouraged to similarly utilize in their efforts to secure a mortgage with the lowest possible interest rates.

Along with rising interest rates comes additional pressures put upon consumers to find ways to afford the mortgages they need. However, experts advise that persons who feel put upon due to rate hikes consider the ARM option on account of the fact that it kicks off with a lower interest rate than that of traditional, fixed rate mortgages. Hence, they can secure the mortgage they need while in the interim make plans to fund rates as they are due to fluctuate over time.
As all are aware, the longer the term of the mortgage, the higher the interest rates tend to be. That is why the major rule of thumb remains that it is best to pay off the mortgage within the shortest amount of time possible. Over the duration of the loan, this will indeed cut down on additional costs and fees.