If you have been watching the housing market at all, you know interest rates have been increasing – quickly! The average 30 year mortgage rate went from about 3.22% in January to about 6% in June, according to Freddie Mac. That is a huge jump but the real question is what does that do to you when it comes to buying a home?
Rising rates definitely will affect how much you can qualify for in a mortgage and will increase your house payment. If you are looking at a home that is $400,000 and you have 20% to put down. That is a mortgage of $320,000. At 3%, your principal and interest payment would have been $1350. Now at 6%, that same payment goes up to just over $1900. That is an increase of $550 monthly. This payment doesn’t include your taxes and insurance, so now your total payment will be over $2000/month – closer to $2300-2400 depending on what the taxes and insurance are.
How does this affect you? If you are looking to stay at that $400,000 sales price, you are going to need to qualify with the higher payment. If you have not talked with your loan officer recently, you need to do that -you want to make sure you can still qualify for the amount you are looking at. Assuming you qualify for the higher payment, you may want to look at your budget. Inflation has increased the cost of most of the items you buy – food, clothing, groceries. In April 2022, NAR (National Association of Realtors) reported that higher spending on other consumer items means that most buyers will have to look for a home that is about $40,000 cheaper. Because of this, you may be wondering if home ownership is for you. Don’t give up – home prices are not expected to drop since we are still in a seller’s market. Most reports show that home prices are expected to increase over the next few years. Remember rents are increasing also and if you own a home, your mortgage is more stable -your insurance and taxes can increase, but your mortgage payment (principal and interest payment) doesn’t if you have a 30 or 15 year fixed rate mortgage.
What can you do to lower your payment? A larger down payment can help, so can paying points to lower your interest rate. Talk to your loan officer about options. Look at your payment if you pay points to drop the rate, but also look at how long it takes to recoup that cost. If rates come down in the next year or two, you may want to refinance and then paying points may not make sense. Try to improve your credit score. The higher your credit score, the lower your interest rates is likely to be. Also if your credit score is higher and you need mortgage insurance, it will help to lower that payment too.
If you are ready to buy, talk to your loan officer about options. Does it make sense to look at an adjustable rate mortgage? Should you pay points? How long will you keep this mortgage? Get as much information as you can and then you can make an informed decision! Remember if rates do drop, you can always refinance. And if home prices continue to increase, you will gain equity by buying now and not waiting.