Friday, May 06, 2005

Unaffordability Matrix

The graph above is hypothetical example of the negative change in the value of a house given an increase in interest rates. In this example I have calculated how much the price of a home has to drop, given a rise in interest rates, so that the monthly payment remains constant.

Beginning with a mortgage of $500,000, and an interest rate of 6%, the monthly payment on the mortgage (excluding taxes) would be $2998.00. If interest rates were to move from 6% to 7.2%, then the mortgage could only be $441,633 in order to maintain the same monthly payment of $2998.00.

On a $500,000 mortgage and a starting with a 6% interest rate, and all else being equal, for every 15 basis point increase in mortgage rates, the total borrowed amount would have to decline roughly 1.6% so that the monthly payment stayed constant.

For the record, Treasuries fell hard today after a much stronger than expected jobs report hit the wire.

Constant Payment Posted by Hello


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