The 30-year mortgage rate has risen rapidly to its highest level since 2019, above 4%. The increase could place pressure on the potential to look in lower price ranges. Others may need to repeat the pre-approval process.
This shift comes after mortgage rates have risen almost a full percentage point since late December. Not too long ago, the 30-year mortgage averaged around 3% APR. Mortgage rates have now risen above 4%+ and may be heading even higher.
Rising Rates Reduce Buying Power
What’s important for potential buyers to understand when it comes to differences in interest rates? Mainly, rising interest rates reduce your buying power. For example, let’s create a scenario where you want your principal and interest on a mortgage payment to be below $2,000 a month.
When the 30-year mortgage was around 3%, you could have borrowed about $450,000 to get a $1,897 monthly mortgage payment. At 4%, you will only qualify for a $400,000 loan with a similar $1,910 monthly payment. One percentage point reduces your affordability by about $50,000.
To help potential buyers visualize how mortgage rates and principal and interest payments can affect your buying power, here’s a chart that shows a starting point of 3.0% and a loan amount of $450,000:
That said, all is not lost for hopeful buyers looking to make a transition this year. Here are some ways would-be buyers can increase their chances of success in addition to having the expert knowledge and experience from a strategic guide.
Update your pre-approval
Old Way: Relying on out-of-date pre-approval letter
New Path: Keep open communication with your lender to ensure rising rates aren’t putting your ability to buy at risk
Many buyers are encouraged to get mortgage pre-approval letters, which describe how much the buyer is qualified to borrow at a specific interest rate. But when rates go up as quickly as they have in recent weeks, pre-approval letters go out of date.
Even if you have a pre-approval letter that may be good for 60 or even 90 days, it’s a good idea to talk to your lender again to ensure that the rising rates aren’t affecting the data in your pre-approval letter.
Adjust your price range
Old Way: Waiting for the “perfect” home instead of the “right” home
New Path: Adjust priorities to focus on what matters most
Higher rates may mean you have to adjust your priorities as you’re searching for your next home. That said, adjusted priorities could mean the opportunity to look for those “diamond in the rough” homes that might need a little TLC. Look beyond some of the cosmetic things in a home that may not be your ideal style. Homes with wallpaper or paint that might not be your style are easy to change. Whatever you’re looking for, you can trust that our team has the unique strategies to accomplish what matters most to you and your family.
Get strategic about reducing your payment
Old Way: Wait and hope things change with prices and mortgage rates
New Path: Strategize about the best ways to accomplish your goals
If you have spare cash, paying discount points may be another option to get a lower rate. Mortgage points are fees you pay a lender to reduce the interest rate on a mortgage. This is often called “buying down the rate” and is completely optional for a buyer. Another option is to pay off outstanding debts to improve your debt-to-income ratio, which can increase the maximum monthly mortgage payment that you’re eligible for.
Rates are still phenomenal! Here’s a comparison
The last time 30-year mortgage rates were high was the week of May 23rd, 2019, when it averaged 4.06% in Freddie Mac’s weekly survey. Even at 4%, that’s still a phenomenal rate!
Here’s some historical perspective.
In Freddie Mac’s weekly rate survey, the 30-year mortgage averaged 4.09% in the 2010s, 6.29% in the 2000s, 8.12% in the 1990s, and 12.71% in the 1980s. The average rate topped out at 18.63% in October 1981, and people still bought houses in those days.
Looking back on these rates from the past offers perspective to the current rates of 2022. However, rates will likely rise throughout 2022, so buying sooner may help lock in a lower rate than waiting. It’s almost important to remember that lenders qualify buyers based on their payment, not on the purchase price. Mortgage rates impact payments more than the sales price.
If this is the year you’re considering a new transition, our team of strategists will work with you to combine your priorities with our unique strategies to create a plan that optimizes your results. We’ll protect you along the path from negotiation to closing. Reach out today to start a conversation!