Mortgage rates increased again bringing some lenders to the highest levels in nearly 7 years, according to Bankrate’s survey of large lenders, as homebuyers are faced with increased costs to borrow money to purchase a home and rising home prices.
According to Freddie Mac, for the week that ended May 10, the average rate for a 30-year fixed-rate mortgage increased 50 basis points to 4.55% from a year ago and the highest level since January 2014.
Market sentiments about strong domestic growth and higher inflation in the country pushed the 10-year Treasury Rates (a benchmark for longer-term rates like mortgages). Following Treasurys, mortgage rates soared.
What happens to homebuyers and homeowners?
Increasing cost to borrow money and increasing home prices could shut a lot of borrowers out of the market. Already there are reports that show drops on mortgage demand as mortgage rates spike the highest in nearly 7 years. First-time home buyers are particularly hit in this as they are more price sensitive. In March, first-time homebuyers made up 30 percent of existing home sales, down from 32 percent a year earlier, according to National Association of Realtors released April 23. The refinance share of mortgage activity also showed a decrease in applications.
What Can homebuyers do?
When buying a home, the mortgage rate does matter, but it shouldn’t monopolize the buyers’ attention. Here are some things homebuyers can do when mortgage rates are increasing:
- Homebuyers could be entering the market now to get ahead of interest rates that could go even higher. They can lock the mortgage rate. With a mortgage rate lock, the lender promises a defined combo of interest rate and points. Homebuyers can close the loan by the specified date and the locked rate will not change even if the rates go up. Homebuyers can do this after the lender has approved a mortgage of a specific house.
- Homebuyers can buy points to reduce the interest rate. Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This can lower the mortgage payment. One point equals 1% of the loan amount. Paying one point often gives a rate cut of one-quarter of a percentage point.
- Take a look at how much house can a buyer afford. A higher mortgage rate brings higher monthly payments. Talk to a lender and determine a range of interest rates that will still allow the buyer the type of home they want without stretching their budget to limit. The rising interest rate may force their price range downward. Check below the home affordability calculator and enter in different mortgage rates to see how the numbers change.
Finding How Much House Can You Afford?
To aid in determining how much house you can afford, mortgage calculator proves to be a handy tool in determining housing affordability. For your convenience, here is a spreadsheet that will help you calculate how much house you can afford.
This How Much House Can I Afford Spreadsheet will help you estimate your affordability on buying a home.
After you finished entering your data on this spreadsheet, you can see your affordable house price. Use this tool as your rough reference only. It is best to consult with people in the financial institution to assess how much house you can afford based on your financial situation. If you have any questions, please do not hesitate to reach us.