Rates recently hit a 16-year high of 6.92%.
Climbing mortgage rates can make homes less affordable and reduce buying power.
Buyers may need to find creative solutions, like lowered house budgets, negotiating with sellers, considering an adjustable rate mortgage (ARM), or refinancing down the road if rates fall.
You’re shopping for a home, and you’re hearing a lot of talk about rising mortgage rates and how they’re affecting the housing market. The truth is, rates can have a big impact on your home search. They can affect how much house you can afford, and how much you’ll pay for that house over time. Here’s what buyers should keep in mind.
Less buying power
Recently, mortgage rates hit a 16-year high, sending shockwaves through the real estate market. As of October 13, 2002, the weekly average 30-year fixed rate was at 6.92%, up from 3.05% that time last year. So what does that mean for buyers? A higher rate usually means a higher mortgage payment, which reduces your buying power. Let’s look at an example.
Say you’re getting a $325,000 mortgage.
At a mortgage rate of 3.05%, your mortgage payment would be $1,379 per month, not including taxes and insurance. With a rate of 6.92%, you’ll pay $2,145 per month. That’s about 55% more than you would have paid a year ago for the same loan amount.
Basically, when rising rates cause a higher mortgage payment, you can afford less house overall.
You may need to reduce your home budget
If you’ve been saving up and preparing to buy a home, it can be frustrating watching rates (and your future mortgage payment) go up. In some cases, climbing rates can price buyers out of the market altogether.
So what can you do? One thing you could do is reduce your home budget. Maybe instead of going for a four-bedroom, two bath house priced at $375,000, you might consider a two-bedroom, one bath condo for $250,000. You could also try negotiating a lower price on a home. Some sellers may be willing to go lower on price to accommodate higher mortgage rates, though it can depend on your individual market.
Or consider another creative solution
Perhaps you could explore other ways to shave money off your mortgage payment. One option might be getting an adjustable rate mortgage (ARM) that starts off with a lower introductory rate and then adjusts to the market rate periodically.
Another thing to keep in mind is that the mortgage rate you get today doesn’t necessarily need to follow you for the next 30 years. You could refinance in the future if rates fall. Keep in mind that you’ll have to pay some closing costs again, so you’ll need to run the numbers to make sure refinancing is worth it.
The bottom line? Motivated buyers may need to find creative solutions, but it’s not impossible. Talk to your lender and your real estate agent to explore your options.
This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.
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