Mortgage rates have increased significantly in recent weeks. And that may mean your clients have questions about what this means for them. Here’s some information that can help you keep your clients better informed when you are discussing their future home plans.
The Impact of Rising Mortgage Rates
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 your clients understand how mortgage rates impact their 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 your clients are waiting for mortgage rates to drop, then they may be waiting for a while as the Federal Reserve works to get inflation under control.
And if they’re considering renting as an alternative while they wait it out, tell them that 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, they’re going to be paying more. The difference is, with homeownership, they’re also gaining equity over time which will help grow their 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.