The Impact of Rising Mortgage Rates
provided by: Amber Martinez
As mortgage rates rise, they impact purchasing power by raising the cost of buying a home and limiting how much someone can comfortably afford. Here’s how it works.
Let’s assume you want to buy a $400,000 home (the median-priced home according to the National Association of Realtors is $389,500). If you’re trying to shop at that price point and keep your monthly payment about $2,500-2,600 or below, here’s how your purchasing power can change as mortgage rates climb (see chart below). The red shows payments above that threshold and the green indicates a payment within the target range.
As the chart shows, as rates go up, the amount someone can afford to borrow decreases and that may mean having to look at homes in a different price point. That’s why it’s important that you as a buyer, understand how mortgage rates impact your monthly mortgage payment at various home loan amounts.
Are Mortgage Rates Going To Go Down?
The rise in mortgage rates and the resulting decrease in purchasing power begs the question if it would be better to wait for rates to go down before making a purchase. Realtor.com says this about where rates could go from here:
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.”
So, if you are waiting for mortgage rates to drop, then you may be waiting for a while as the Federal Reserve works to get inflation under control.
And if you’re considering renting as an alternative while you wait it out, that’s going to get more expensive with time too. As Nadia Evangelou, Senior Economist and Director of Forecasting at the National Association of Realtors (NAR), 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.”
Basically, it is true that it costs more to buy a home today than it did last year, but the same is true for renting. This means, either way, you’re going to be paying more. The difference is, with homeownership, you’re also gaining equity over time which will help grow your net worth.
Each person’s situation is unique, but depending on the timeline, now might be a good time to buy before the interest rates rise even higher. It might also take a longer term outlook, but equity is a strong selling point, and owning a home is never a bad investment!