Mortgage Rates And Home Purchases

For those that are planning to buy a home in 2022, it is crucial to understand the correlation between mortgage rates and purchasing power. Your purchasing power is essentially how much home you can afford that is within your financial reach. Mortgage rates directly correlate to your monthly payment and impact the amount you’ll have to spend to acquire your home. As we have seen rates rise over the course of the past five months, monthly payments are also on the rise. In a rising-rate environment, your purchasing power is quickly eroded. With your rising monthly payments, your affordability is crushed, and your purchasing power is eroded. This is how mortgage rates and home purchases are correlated.

With the 30-year fixed mortgage rate now above 5% for the first time since the early 2000s. Experts are also predicting rates to continue to rise, reaching at least 6% by the end of the current year. If you have the opportunity to get ahead of the rate increase, now would be the time to do it. Remember, 5% mortgage rates are high in comparison to the past years, but low in a historical sense.

Mortgage Rates And Home Purchases Moving Forward

Mortgage rates play a substantial sized role in the ability to purchase a house. There is a direct correlation between mortgage rates and your ability to actually purchase a home at any given period. In the chart provided below, you can get a snapshot of how your monthly payment varies based on your mortgage rate. If, for example, your budget is around $2,000-$2,200, here is how your mortgage rate impacts affordability. The green on the chart indicates a typical payment within that range, while red is outside the range.

As the chart displays, you are much more likely to exceed your payment target as mortgage rates quickly increase. If you are paying a higher mortgage rate, then you will likely have to lower your price target for your home. If you could afford a $400,000 home at sub-5% mortgage rates, you could not after they eclipse them. For those who are ready to buy a home, the increasing mortgage rate situation should provide you with some added motivation to purchase now. If you can get ahead of the higher rates, you will likely be able to stay within your purchase range.

Working With Professionals Helps

For those who are unable to navigate the market, that is where professionals come in to play. It is critical to keep a budget top of mind, as you are searching for a home. Danielle Hale, Chief Economist at realtor.com, describes budgeting and the beginning process like this:

“Get preapproved with where rates are today, but also consider what would happen if rates were to go up, say another quarter of a point, . . . Know what that would do to your monthly costs and how comfortable you are with that, so that if rates do move higher, you already know how you need to adjust in response.”

No matter what the best strategy might be, it is important to try to come up with one with an industry professional. This is where a trusted real estate agent and lender comes into play. They are able to create a plan with you that takes rising mortgage rates into consideration. With their help, you can get an educated guess on your budget where rates are today and craft a strategy so you are ready to adjust as rates increase.