How To Adjust Your Homebuying Budget for Higher Interest Rates

Couple shakes hands with realator in fron of new home.
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If you’re considering buying a home, you might have sticker shock when you look at your potential mortgage payment.

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Homes that were quite affordable two years or even just 12 months ago are now out of reach for many buyers, due to two main factors. First, mortgage rates bottomed out in January 2021 at an all-time low of 2.65%, meaning current rates are already more than double what they were just at the start of 2021.

Next, home prices also have soared, jumping 14.7% from July 2020 to July 2021 alone, on the back of big gains earlier in 2020. Put it all together and mortgage payments have jumped substantially.

But this doesn’t mean that you have to give up your dream of buying a new home. You just need to be prepared for the new math. Here’s a look at how interest rates and home prices have affected mortgage payments — and how you can adjust to the “new normal.” 

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Where Have Interest Rates Gone?

After bouncing off the all-time lows seen in 2021, mortgage rates have moved steadily higher. Still, mortgages could be had for about 3.29% at the start of 2022, a far cry from the 5.65% or more that many homebuyers face today. While an additional 2.36% increase in rates might not seem like too much, a look at the math proves otherwise. 

Imagine a scenario in which you’re looking to put 20% down on a house that costs $450,000. At a 3.29% interest rate, your payments would be $1,575. If you’re stuck with a 5.65% rate instead, however, your payment will leap to $2,078. That translates to a $503 jump in payments, or a whopping 32%, just over the span of seven months. Things look even bleaker if you jump back to the all-time low rate of 2.65%, when your payment would have been just $1,451.

In times like these, it pays to take a long-term perspective. Historically speaking, 30-year mortgage rates have averaged between 7% and 8%, which is still significantly above current rates. In the 1980s, rates peaked out at a whopping 18%, more than triple current rates. At those levels, your 30-year mortgage payment on a $450,000 home with a 20% down payment would be an astonishing $5,426.

The bottom line: While rates have indeed pushed up mortgage payments dramatically, historically speaking, rates are still not that high. If you can block out the past few years of artificially depressed interest rates from your mind, you’ll be able to cope better with the current reality. 

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How Much Do Higher Home Prices Affect Mortgage Payments?

Interest rates are only one of the factors driving up mortgage payments in 2022. The other is the price of houses themselves. While there are signs that the housing market might be rolling over a bit as of August 2022 — thanks in part to rising interest rates — prices still remain very elevated over just a few years ago.

It’s entirely possible that a home you might be looking at today for $450,000 was worth just $375,000 a few years ago. At a 5.65% interest rate with 20% down, this would jump your payment from $1,732 to $2,078. 

Ways To Combat Higher Mortgage Payments

Market interest rates and the price that sellers list their homes at are factors beyond your control. However, here are some steps to help mitigate the amount you have to pay for your mortgage. 

Wait for Prices To Come Down

In July, home prices fell for the first time in three years. After the remarkable housing appreciation of the past few years, it’s entirely possible that prices will continue to fall.

Wait for Rates To Come Down

The Fed is currently raising interest rates aggressively to rein in inflation, but it’s inevitable that when inflation finally cools down so too will interest rates. This may take months or even years, but it’s a natural part of the business cycle.

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Be Flexible

If you’re holding out for a home that matches 100% of your wants and needs, you’ll likely have to pay a premium for it. Consider looking for a home in a less expensive area, or find a fixer-upper that no one else wants. You may have to put in time and additional money to get exactly what you want, but your upfront savings could be substantial.

Put in Lowball Offers

As word spreads that the housing market is softening, some sellers will no doubt panic. Don’t be afraid to toss out a few lowball offers to see whether you can snag a deal.

Take Out an Adjustable-Rate Mortgage

Although adjustable-rate mortgages do have risks, if you believe rates will fall over the next few years, there’s no need to wait for this to happen. Simply take out an ARM now, which will have a lower rate than a fixed-rate mortgage, and refinance into a fixed-rate mortgage in the future if rates fall.

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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