Mortgage Rates Have Jumped. Just How Bad Is It?
In a word, bad. At least in terms of historic interest rate moves, which have rarely rivaled the massive increases we’ve seen in such a short span.
But you have to consider context as well, such as the starting point for mortgage rates before this recent spike higher (near all-time lows).
Along with how impactful the increase in monthly payment will be for home buyers and those looking to refinance.
One should also consider that just about everything is going up in price (or already has), and that the U.S. dollar isn’t what it was once.
Taken together, it may not be all that horrible, though it does depend on individual circumstances, and for home buyers, is clearly another piece of unwelcome news.
Let’s Compare Monthly Payments on a Typically Priced Home
The typical home is valued at about $332,000, per the Zillow Home Value Index, a 20.3% increase from a year ago.
Meanwhile, the average 30-year fixed mortgage rate is pricing around 4.75% for vanilla scenarios, aka those with excellent credit, a 20% down payment, and so on.
At the start of 2022, the 30-year fixed was priced closer to 3.25%, so the move higher has been substantial. No one can debate that.
But let’s look at how it might affect the average home buyer’s pocketbook, instead of simply freaking out at the difference in rate.
We’ll assume our hypothetical home buyer purchases a property for $332,000 and puts down 20%. That leaves them with a loan amount of $265,600.
Had mortgage rates not budged since the start of 2022, they’d have a monthly principal and interest payment of $1,155.91.
Unfortunately, they have budged, in a major way, and are now closer to 4.75%, depending on the bank or lender in question.
Using the same loan amount, the monthly P&I is now $1,385.50, which is nearly a 20% increase.
On a dollar amount basis, it’s the difference of about $230, which again is nothing to sneeze at.
At the same time, in the grand scheme of things it’s not a massive amount of money, especially when we’re talking about a home purchase.
And again, because inflation is rapidly eroding the value of the dollar, that difference can be minimized to some degree, assuming wages are also increasing.
To put it in perspective, it’s the cost of filling up an SUV twice in many states these days, thanks to the high price of gasoline.
What About a Typically Priced Home in Los Angeles?
Now a difference of $200 a month doesn’t seem horrendous for a housing payment, despite clearly being more expensive.
But consider pricier housing markets nationwide, such as Los Angeles. There, the typical home value is a whopping $944,651, per Zillow.
Again, assuming a 20% down payment for a loan amount of $755,720, the monthly principal and interest payment was $3,288.94 to start off 2022.
Today, it’s $3,942.19, factoring in that much higher 4.75% mortgage rate. That’s a difference in monthly payment of $653.25.
While you could argue that incomes might be higher in Los Angeles, it’s still a pretty big chunk of change.
In fact, it’s nearly $8,000 more annually, while the typically priced U.S. home is now only $2,760 more per year.
Obviously both increases are a blow to home buyers, who are already grappling with housing affordability due to a massive increase in home prices.
But some housing markets are certainly worse off than others.
Check out my mortgage rate charts to quickly determine the difference in payment at various interest rates and loan amounts.
So What Should You Do? Wait to Buy, Hurry Up, or Just Rent?
Now that owning a home just got a lot more expensive, you might be wondering if it’s prudent to keep looking, keep renting, or get even more aggressive.
Personally, I think those in the market to buy a home should have adequate cash reserves to absorb a mortgage rate increase like this, whether the mortgage lender requires it or not.
If you’re planning to buy a home, you should have money for the down payment, closing costs, and several months of mortgage payments, ideally a year’s worth or more.
That way you can handle a higher mortgage rate and/or higher asking price. If you’re merely scrapping by, you’ve probably already been priced out.
If you have reserves, and ample income as well, chances are you can still proceed with a home purchase, despite the higher monthly payment.
And you should still want to be a homeowner, even if financing costs have risen. If you’re on the fence with rates above 4%, maybe you don’t want to be a homeowner.
It’s hard to predict what happens next, and I’ll admit I’ve been wrong lately with rates continuing to climb higher and higher this year.
But I still believe we’ll get some respite soon, given the nonstop increases with seemingly all the bad news baked in.
And while it’d be logical for home prices to drop given the higher cost of financing, that might not actually happen.
Both could continue to rise, which bolsters the argument to hurry up and find a home already.