Yes, inflation is biting into spending, but even with inflation (CPI) up 8.5% over the last year (as of the data released on April 12th), mortgage rates have risen from 3.31% in December to 5.13% this week, a 55% increase. This increase is vitally important for most potential home buyers, essentially anyone who isn’t going to pay cash for the house they want to buy. When people look to buy a home, most people aren’t too concerned with the actual purchase price. They buy homes based off the amount of the monthly mortgage payment. Today, I’ll dive into the effect of rising mortgage rates, and why it is bad news for new home buyers.
An $345 Extra Per Month!
If home prices stay the same and mortgage rates increase, monthly mortgage payments for a borrower will be higher. I’ll run through three examples: buying a median house with the December 2021 mortgage rate, buying a median house with current mortgage rates, and buying a house with the current mortgage rate and the same monthly payment as the December 2021 example. At the end of 2021, the median sales price of a house in the United States was $408,100. I’ll use this price for the first two examples and then find the home purchase price in the third example.
All of these examples assume a 20% down payment, and even though I know this is unlikely for many buyers, this makes the example more conservative than if a smaller down payment is made. The reality is that the actual mortgage payments will be higher than in the example. Below is a table showing the three different home buying scenarios:
As you can see, if you take out a mortgage with the same loan amount now compared to in December, there is a massive increase, from $1,431 to $1,778, for your mortgage payment in only four months. The increase equates to slightly more than $347 more per month or $4,164 per year. This is an increase of 24% for mortgage payments. If you looked to keep the mortgage payment constant with the change in interest rates, you would have to buy a house that is 19.5% cheaper than the median sales price from December 2021. This means you would have to reduce your purchase price from $408,100 to $328,500. For some people, this increase in mortgage cost may not mean too much, but for others, the increase in cost will undoubtedly them from buying homes.
$345 is Just the Start
The above examples are based only on the principle and interest payments for the mortgage. It doesn’t include the multiple other costs associated with having a mortgage or home ownership. You’ll also need to add in property taxes, homeowner’s insurance, mortgage insurance (if necessary), maintenance and repairs, utilities, and any other cost associated with home ownership. And most of those costs are likely increasing with inflation as well. Despite overall inflation stealing the headlines, rising mortgage rates may prevent many first-time home buyers from being able to afford a home. If mortgage rates continue to rise, it could be a bad sign for the housing market and the overall economy.
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