Originally posted on LinkedIn Pulse
Rising interest rates have left a lot of would-be home buyers wondering just how much house they can afford. Some are wondering if they can afford a house at all, or have they been inducted into the Renter for Life society? Why?
After seeing fixed rates in the 2% to 3% range a few short years ago, seeing rates of 6% to 7% has created a bit of sticker shock when it comes to home buying. Add to that the fact that home prices in certain local markets have not dropped as much as some had hoped, it all adds up to higher payments, and a lot of unanswered questions.
Curious about how the interest rate hike has affected payments and affordability?
Here’s an example (and we’re going to go with a simple conventional loan in this scenario), a $450,000 purchase price with a 20% down payment and a fixed rate of 6.125% yields a monthly payment of $2,187.40. This does not include the buyer’s escrows for taxes and homeowners’ insurance. Two years ago, that same scenario with an interest rate of 3.125% would have you paying $1,542.00 per month. Again, this does not include the buyer’s escrows for taxes and homeowners’ insurance. An increase like that ($645.40 more per month / $7,744.80 more per year) is enough to make anyone do a double take before signing on the dotted line.
The rising interest rates have left a lot of people wondering if they’ve missed the bus. I have had potential buyers tell me that their fear is that they will never own a home now that the rates are up. For anyone who is thinking about buying a home, before giving yourself the title of Renter for Life, let’s get answers to a few questions:
- Are Interest Rates Higher? – Yes, interest rates have increased to combat inflation.
- Are Interest Rates at their worst? – No, interest rates are not at their worst. And this is not the first time that the Federal Reserve has tried to combat inflation by raising interest rates. In 1971, Freddie Mac started surveying mortgage lenders. At that time, a 30-Year Fixed-Rate Mortgage was between 7.29% and 7.75%. In 1981, mortgage rates reached an all-time high of 18.45%. This was due to the Federal Reserve raising interest rates to combat inflation. While the strategy did help get inflation back under control, mortgage interest rates remained in the double-digits until the early 1990s.
- Will it take a decade for rates to drop again? – This is a bit of a grey area. While there’s no definitive “Yes or No” answer to this question, it can be said that early indications are that mortgage rates will drop slightly in 2023, and even more so in 2024.
- How much will rates drop? – Again, this is a bit of a grey area. And while this question, like the previous has no definitive “Yes or No” answer, there are a few underlying questions that (we feel) do:
- Will rates be as low as they were before the hike? – No.
- Will rates come down as quickly as they went up? – No. The average rate of a 30-year fixed-rate mortgage was 3.9% at the start of 2022. By the end of the year, the average increased to 6.6% for a 30-year fixed-rate mortgage.
- Are there other options besides a Conventional 30-Year Fixed-Rate? – Yes.
Now, those are just a few high-level questions in that brief Q&A. You probably find yourself with even more questions after reading this article. So, what’s next?
Talk to a mortgage lender or broker when it comes to finding out just how much house you can afford. It’s important to have an accurate price range before you start looking at properties. Your lender or broker will be able to help calculate your monthly payments as well as give you a solid estimate on closing costs. They’ll review your credit and go over what options are available to you. Once you’ve had that conversation, if qualified, your lender or broker will be able to provide you with a preapproval. At the end of the day, you will have set your home purchase budget, and you’ll be able to show sellers that you are serious about making a purchase. Best of all, this is provided to you at no cost.
So, can you afford the American Dream? Perhaps. If you are looking for a licensed mortgage professional in Pennsylvania, give us a call. We’ll be more than happy to help you answer that question.