Final answer:
A buyer can afford a more expensive home if they secure a mortgage at an interest rate significantly below the prevailing rate as it reduces the total interest paid and allows for more money to be applied to the principal with each payment, even when accounting for additional costs such as mortgage insurance.
Step-by-step explanation:
If a home buyer is able to secure a private mortgage loan significantly below prevailing interest rates, the buyer can afford to borrow more money for the same monthly payment, effectively increasing their purchasing power when buying a house. For example, if the prevailing rate is 4% but the buyer secures a 2% rate, they will pay less interest over the life of the loan. Therefore, the total amount they can afford to pay for a house increases.
It's important to consider that obtaining a lower down payment, such as 0-3.5%, often comes with the requirement of paying for mortgage insurance. This insurance protects the lender in case the borrower defaults but does increase the overall cost of the mortgage. Therefore, a lower interest rate might help counterbalance the cost of this insurance and allow the buyer to afford a more expensive home.
Lower interest rates also mean lower monthly payments, which can give a buyer more flexibility in their budget or the ability to afford a larger loan. As mortgage interest rates drop, the total interest paid over the life of the loan decreases, allowing for more Principal to be paid down with each payment. Hence, the buyer could take on a larger initial loan while keeping their yearly commitment, like the $12,000 a year mentioned in the reference, for a house loan unchanged.