The real impact of rising mortgage rates
If you’ve been watching the housing market, you already know mortgage rates have risen sharply in 2022. The average 30-year rate went from just 3.22% in January to nearly 6% at the end of June, according to Freddie Mac.
That’s a big jump by any measure. But what exactly do higher rates mean for home buyers? If you’re in the market, how will rates near 6% impact your monthly payment and/or housing budget?
Ultimately, that depends on your personal finances and your home buying strategy. Here’s what you should know.
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How much do mortgage rates impact home buyers?
Rising rates can have a big impact on home buyers, both in terms of their monthly payments and their housing budgets.
Imagine you’re buying a home for $400,000 with 20% down. A 30-year fixed-rate loan at 3% would cost about $1,350 per month for principal and interest. At a 6% rate, that payment goes up to about $1,900 per month for the same home price.
In this scenario, buying at 6% versus 3% costs you:
An extra $550 per monthAn extra $205,000 in interest payments over 30 years
Examples generated using The Mortgage Reports mortgage calculator. Your own interest rate and monthly payment will be different.
The jump in rates has created an affordability squeeze for many home buyers. But there are ways you can strategize around higher rates to keep your goals within reach.
How higher mortgage rates can affect your home buying plans
Buyers can absorb higher interest rates in one of two ways. If you still want to buy at the same price point, you’ll likely be looking at a higher mortgage payment. But if you want to keep your monthly payment amount the same, you’ll likely need to look at homes that are more affordable.
Here are a couple of examples to show how interest rate changes can impact affordability in today’s housing market.
1. Higher monthly payments
In this example, we assume a home price of $250,000, which can still buy you a property in many states. We also assumed a 3% down payment, which is the minimum for a conforming loan with most mortgage lenders. Of course, the numbers will look different based on your own home price and down payment.
With those assumptions, we first ran the figures at a 3% mortgage rate, which you might have been able to get a year ago. Then we changed the mortgage rate to 6%, which is closer to what you might pay today.
30-Yr Fixed Mortgage RateMonthly P&I PaymentTotal Interest Over 30 Years3%$1,020$125,5606%$1,450$280,920
Payment estimate includes only principal and interest on the mortgage loan. Other costs like homeowners insurance, property taxes, and HOA dues are not included.
Provided this buyer wants to purchase a home at the same target price, they’d be looking at a monthly payment about $330 higher than a year ago.
But that’s not the only way to approach home buying in a rising-rate environment.
If you don’t want to increase your monthly mortgage payment, you have the option to keep your payment stable and look at homes in a lower price range. This could help you stay within budget despite paying more in interest.
2. Smaller home buying budget
The mortgage calculator we used earlier has a tab called “By Monthly Payment.” Click on that, and you can input the amount you plan to spend on your mortgage each month. In the current circumstances, that can be a very sensible way to approach home buying.
Say you want to stick to a monthly principal and interest payment of $1,500 and you have $25,000 to spend on a down payment. Here’s how your home buying budget might have changed, again looking at 3% and 6% fixed-rate scenarios.
Mortgage rateMonthly P&I PaymentAffordable Home Price3%$1,500$338,6306%$1,500$253,580
Of course, finding a home that meets your needs at a lower price point might be easier said than done. But keep in mind that home values have been rising rapidly across the nation. If you can get into a more affordable home now and start building equity, you may be able to buy your dream home a few years down the road.
Shifting affordability in today’s market
Rising rates and home prices aren’t the only factors impacting prospective buyers in today’s market. Sharp inflation has raised the cost of other consumer goods, meaning some buyers have less expendable income to spend on a mortgage.
Indeed, in April 2022, NAR reported:
“The higher spending on other consumer items means that the consumer will have less income to spend on a mortgage payment and will be looking for a home that is about $40,000 cheaper.”
–National Association of Realtors
With such affordability issues on every side (higher mortgage rates, home prices, and living costs), you may be wondering whether homeownership is, after all, for you. But don’t give up now. Make some compromises, and you might yet be crossing your very own threshold soon.
Run the numbers for your own situation
Keep in mind that average figures can be misleading. For example, the median sales price for homes nationwide was $during the first quarter of 2022, according to the Federal Reserve Bank of St. Louis. But you may want to buy somewhere with vastly higher or lower prices.
Similarly, Freddie Mac’s average 30-year fixed interest rate was 5.78% on June 16. But that average includes all sorts of borrowers. Those with excellent finances may have gotten substantially lower rates than average.
You may be a super-prime buyer with a big down payment, stellar credit score, and few debts. Or you may just sneak under the homebuying wire with a 3.5% down payment and a 580 credit score with an FHA loan. These things make a big difference to the mortgage rate you’ll actually be offered.
You can see how much difference higher mortgage rates have made to your personal situation by using our mortgage calculator. Plug in your own data, based on home prices where you live and the mortgage rate you think you’ll qualify for, to estimate your own home buying budget and mortgage payment.
Tips to afford more house at higher mortgage rates
We recently ran a feature article called “Nine ways to beat rising interest rates as a home buyer,” which should help if you’re looking to purchase a home at today’s mortgage rates.
Here’s a brief recap of some of the best strategies you can employ as a home buyer in a rising-rate environment:
Buy down your rate with discount points. If you can afford to pay more than the minimum at closing, you can usually purchase a lower mortgage rate for the life of your loanCompare mortgage rates from different lenders and make them compete for your business. Since there are fewer people looking to buy and refinance in a high-rate environment, you have more leverage to negotiateConsider an adjustable-rate mortgage (ARM), which typically comes with a lower initial interest rateBoost your credit score. The higher your score, the lower your mortgage rate is likely to beChoose a different loan product. Switch to a different type of mortgage if that will reduce your monthly payments
There’s no magic trick for getting around the affordability issues home buyers currently face. But whittling down your mortgage rate while choosing a less costly home could give you the flexibility you need to make your homeownership dreams a reality. Yes, it may take a while. But wouldn’t it be worth it?
Your next steps
If you’re looking to buy a home in today’s market, and wondering how rising rates will impact your decision, connect with a mortgage lender. Interest rates are tailored to each individual borrower, and your rate could be lower than average. Your loan officer will walk you through your options and help you find the best, most affordable path to homeownership.
Ready to get started?
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.