Recent news in the housing market is providing a glimmer of hope for many families: mortgage rates are dropping.
Last week, the average interest rate for a 30-year fixed mortgage fell to around 6%, marking the lowest rates seen in nearly three years.
While lower rates mean existing homeowners pay less per month, they also do something even more important—they make it possible for millions of additional people to buy a home for the first time.
Small Changes, Big Impact
Even a tiny drop in interest rates can have a massive impact on who can afford a house.
According to new estimates from the National Association of Home Builders (NAHB), here is how the numbers break down for a typical new home priced at $413,595:
- At a 6.25% rate: Roughly 31.5 million households earn enough money to qualify for a loan at this price.
- At a 6.00% rate: That small 0.25% drop allows an additional 1.42 million households to qualify.
Why do small drops help so many people?
The reason a small rate cut helps so many people at once is due to how much the average American earns.
Most U.S. households have "middle-class" incomes. Because so many people earn similar amounts of money, the "income threshold" (the minimum salary you need to get a loan) often sits right where those millions of families are positioned.
When the interest rate drops, the minimum salary required to buy a house also drops.
This "slides" the requirement down into a range where a huge number of workers—specifically those earning around $105,000 to $132,000—suddenly find themselves eligible for a mortgage.
The Difference Between 6% and 7%
The impact of falling rates is actually stronger when rates are lower. For comparison, if rates dropped by the same amount but at a higher level (for example, from 7.75% down to 7.5%), it would only bring about 1 million new households into the market.
Because rates are now hovering around 6%, each further decrease helps a much larger group of people achieve the dream of homeownership than it would have a year ago.
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Read more: A Guide to Housing Counselors: How They Help You Buy and Keep a Home
