Will Higher Mortgage Rates Make a Home Purchase Unaffordable?

Still Possible to Purchase a Home with Rising Mortgage Rates

Are you looking to purchase a home? Do you think that you can afford your mortgage payment? With rising home prices and rising mortgage rates, rising mortgage payments might make it harder to buy a home.

According to a Core Logic blog, mortgage payments in 2018 are going to rise by about 15%. They analyzed the "typical mortgage payment" based only using principal and interest payments, assuming a 30-year fixed rate mortgage, and 20% down payment. Based on a 0.85% increase in mortgage rates between November 2017 and November 2018, a median sale price increase of 4.6% in nominal terms, they concluded that:

In nominal terms the typical mortgage payment’s year-over-year gain would be 15.5 percent.

When purchasing a home and shopping for a mortgage, you need to take into consideration many factors including mortgage rates and home prices. However, in the bottom line, to determine if the mortgage is affordable, then you also need to consider you own financial situation, including your credit, your monthly income and monthly debt payments.

Rising Rates: Strong Beginning in 2018

Mortgage rates started off 2018 at around 4%. By the end of February 2018, they hit about 4.5%, a bigger increase than many predictions.

Based on Freddie Mac’s PMMS mortgage rates have taken a big hike in February 2018. The average 30-year Fixed Rate Mortgage (FRM) jumped from 3.78% in September 2017, to 3.95% on January 4, 2018 and then 4.4% on February 22, 2018.

Freddie Mac constantly reviews their mortgage rate forecast. According to their February forecast, mortgage rates will hit 4.9% by Q4 2018.

Home Prices: Just How Much More Will They Increase

Home prices took a plummet in 2007. Since reaching a low point in 2013 home prices have steadily increased.

According to data from Census and U.S. Department of Housing and Urban Development median home price for new homes has increased from $204,200 in October 2010 to $343,000 in November 2017. While new home prices are traditionally higher than second home prices, they give us a basis of comparison to start checking the monthly payments of a purchase mortgage.

source: U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, Median Sales Price for New Houses Sold in the United States [MSPNHSUS]

Rising Mortgage Rates and Mortgage Affordability

Based on current data and assumptions median new home prices during 2018 are going to rise by a modest 3% and 30-year FRM mortgage rates are going to go up 20% (both compounded monthly):

• Mortgage Rates will go from 4.03% in January 2018 up to 4.91% by the end of 2018.
• Median New Home Prices will increase from $323,000 in January 2018 to $332,834 by the end of 2018.

Using those assumptions, your monthly payment will increase by $177 and you will need to come up with another $1,965 for your down payment. In order to qualify for a mortgage, assuming a debt to income ratio (just for mortgage principal and interest payments) of 20% your required qualifying income needs to increase by $886 from $6191 to $7077.

The following chart shows the rise in down payment requirements and monthly payments:

Rising Rates and Mortgage Affordability in 2018: Your Game Plan

Predictions and forecasts are not always accurate. However, we all know that if the experts predict cold weather with rain and snow, then we better get prepared and dress accordingly.

One very important factor to consider is your overall income and credit worthiness. Is your credit good to excellent? Is your employment situation stable? Do you think that your income is going to increase at a faster pace than the predicted monthly mortgage payment?

Since the general expectations are that home prices are going to rise moderately and mortgage rates more steeply, it is a good idea to get your finances in order and check if you can qualify for a home mortgage loan.

Here are some considerations when looking to qualify for an affordable home loan:

1. Save money and build up a down payment fund to cover at least 20% of the cost of the home. If not, then shop for a low-equity/high LTV loan such as a FHA loan, or a conventional loan with a 3-5% down payment.
2. Build up your credit. It takes a good credit score to qualify.
3. Pay off debt and lower your debt to income ratio. When taking out a loan and considering the affordability factor, mortgage lenders look at your overall monthly debt payments, including your principal and income payment, property taxes, property insurance, and non-housing debt payments (student loans, auto loans, credit card payments, and personal loans). A DTI of 36% is considered moderate.