How higher mortgage rates shape buyer affordability

Are you considering buying a new home but worried about the rising mortgage rates? You’re not alone. With the recent increase in mortgage rates, many potential homebuyers are facing affordability challenges. In this article, we’ll explore how the higher mortgage rates are shaping buyer affordability and what you can do to still make your dream home a reality.

The Impact of Higher Mortgage Rates on Affordability

Before we dive into the specifics, let’s understand what exactly we mean by mortgage rates. A mortgage rate is the interest rate charged by a lender for a home loan. It is one of the key factors that determine a buyer’s monthly mortgage payment. Higher mortgage rates mean a more expensive loan, resulting in an increased monthly mortgage payment.

Since mortgage rates have a direct impact on monthly payments, it also affects buyer affordability. With higher rates, buyers are limited in the amount they can borrow, reducing their purchasing power. This can force buyers to look for homes in a lower price range or delay their home buying plans altogether.

The Current State of Mortgage Rates

Over the past year, mortgage rates have been steadily rising. In May 2021, the average 30-year fixed mortgage rate rose to 3.18%, the highest it’s been since June 2020. This may not seem like a significant increase, but when compared to last year’s average of 2.85%, it translates to an almost $100 increase in monthly payments for a $350,000 mortgage.

The rise in mortgage rates can be attributed to the improving economy and rising inflation rates. As the economy recovers from the pandemic, demand for homes is increasing, which puts upward pressure on rates. Additionally, the Federal Reserve has signaled that they may start reducing their bond-buying program, which will impact mortgage rates further.

The Impact on Home Affordability

For First-Time Homebuyers

First-time homebuyers often have a limited budget and rely on low mortgage rates to make homeownership affordable. With the rise in rates, these buyers may find it challenging to enter the housing market. They may have to settle for a smaller or less desirable home, or in some cases, put their homeownership dreams on hold.

For Current Homeowners

For current homeowners looking to upgrade to a bigger or better home, the higher mortgage rates can also impact their affordability. They may need to reconsider their budget and adjust their expectations or postpone their move until rates become more favorable.

What Can Buyers Do?

Shop for the Best Mortgage Rates

Despite the rising rates, it’s still possible to find a good mortgage rate. Shop around and compare rates from different lenders to find the best deal. Also, consider using a mortgage broker who can do the legwork for you and find the most competitive rate.

Consider Adjustable-Rate Mortgages

Adjustable-rate mortgages (ARMs) offer lower interest rates in the initial years, making them a more affordable option. However, these rates can increase over time, so it’s essential to carefully evaluate your financial situation and future plans before choosing an ARM.

Improve Your Credit Score

Having a good credit score can help you secure a lower mortgage rate. Make sure to pay your bills on time, reduce your debt, and keep your credit utilization in check to improve your credit score.

Wait for Rates to Stabilize

If you’re not in a hurry to buy a home, you can wait for mortgage rates to stabilize or go back down. Keep an eye on economic and market trends to make an informed decision.

Conclusion

Higher mortgage rates are undoubtedly impacting buyer affordability, but it’s not all bad news. With proper research, planning, and taking advantage of available options, you can still achieve your homeownership dreams. Don’t let the current rates discourage you from buying a home; consult with a financial advisor or a reputable mortgage lender to explore your options and make the best decision for your situation.