Over the past few weeks, we’ve seen how mortgage rates have increased significantly. If you are in the process of buying a home, or it’s something you’ll begin soon, you likely have some questions.
To help you make sense of these changing rates, along with what happens when we wait for those rates to go down, we’re sharing a few important rules of thumb. We hope this help you to make an informed decision.
How We’re Impacted When Mortgage Rates Rise
Rising mortgage rates have a serious impact on your purchasing power. By limiting how much you and your family can reasonably afford and raising the actual cost of buying a home, you may be left looking at less home than you previously wanted. Let’s break down how this works.
As a starting point, we’ll take a $400,000 home (given that $389,500 is the median price for a home, according to the National Association of Realtors). For homeowners looking to buy a home at this price point while keeping the monthly mortgage payment in the range of $2,500-2,600, we can refer to the following chart. It reflects how purchasing power is affected by climbing mortgage rates. In red, we see payments over that threshold and in green we see payments that are within the target range.
As you can see from this chart, rising mortgage rates directly affect the amount a buyer can afford to borrow. As that amount decreases, so does the overall price point for the home in a prospective buyer’s budget.
To understand your own situation, it’s always advisable to work directly with a real estate advisor. With their experience and knowledge of the markets, they can assist in understanding how your mortgage payment at various loan amounts will be affected by these changing mortgage rates.
When Will Mortgage Rates Go Back Down
It’s a natural reaction to rising mortgage rates and the decrease in purchasing power that follows to ask about waiting for the rates to go back down before you buy.
For more on short-term projections of mortgage rates, Realtor.com says the following:
“Many homebuyers likely winced . . . upon hearing that the Federal Reserve yet again boosted its short-term interest rates by three-quarters of a percentage point—a move that’s pushing mortgage rates through the roof. And the already high rates are just going to get higher.”
In other words, if you plan on holding out for mortgage rates to settle back down again, you could be waiting for a while, especially as the Federal Reserve tries to get inflation back under control.
If you’ll be a first-time homeowner, you may be thinking that you can just stick with renting. Unfortunately, rent prices aren’t immune to inflation and they are going to rise, too.
Take a look at what Senior Economist and Director of Forecasting at the National Association of Realtors (NAR), Nadia Evangelou, says:
“There is no doubt that these higher rates hurt housing affordability. Nevertheless, apart from borrowing costs, rents additionally rose at their highest pace in nearly four decades.”
In short, not only does it cost more to buy a home now than it did at the same time last year, but it also costs more to rent, too. No matter how you think about it, you’re going to end up paying more.
So rather than timing the market, it’s better to ask a more personal question: which situation – renting or buying – makes more sense for you and your family?
Final Thoughts On Changing Mortgage Rates
One of the best ways forward with your home-buying decision is to consult with a real estate professional. They can give you a better sense of both your purchasing power and the right path forward.