How to Afford a Mortgage When Interest Rates and Home Prices Are Rising

It’s no secret that it’s a tough market for potential home buyers.

In October, US buyers needed to earn $107,281 to afford the median monthly mortgage payment of $2,682 for a “typical home,” Redfin reported this week.

That’s 45.6% more than the $73,668 annual income needed to cover the average mortgage payment 12 months ago, according to the report.

The main reason is rising mortgage rates, said Melissa Cohn, regional vice president at William Raveis Mortgage. “The bottom line is that mortgage rates have more than doubled since the beginning of the year,” she said.

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Despite the sharp drop reported this week, the average interest rate on a 30-year fixed-rate mortgage of $647,200 or less hovered below 7%, compared to below 3.50% in early January.

And while home values ​​have fallen in some markets, the median selling price is higher than it was a year ago.

“Home prices have risen significantly, mortgage rates have more than doubled and it’s just stifling for affordability,” said Keith Gumbinger, vice president of mortgage website HSH.

Meanwhile, the higher cost of living is still weighing on Americans’ budgets, with annual inflation hit 7.7% in October.

How to make your mortgage cheaper

While current conditions are feeling bleak for buyers, experts say there are some ways to reduce your monthly mortgage payment.

For example, a higher down payment means a lower mortgage and lower monthly payments, Gumbinger explained. “More down in an environment like this can definitely play a role in getting your mortgage costs under control,” he said.

Another option is an adjustable rate mortgage, or ARM, which offers a lower initial interest rate compared to a fixed rate mortgage. The rate later adjusts to the market rate at that point in time at predetermined intervals.

An ARM might also be worth considering as long as you understand the risks, Cohn said.

Rising interest rates are crowding out potential homeowners

If you plan to stay indoors for several years, there’s a risk you won’t be able to refinance into a fixed-rate mortgage before the ARM adjusts, she said. And in a rising rate environment, it’s likely to adjust higher.

Your eligibility for future refinancing may change if your income decreases or your home value decreases. “It’s a bigger risk, especially for a first-time buyer,” Cohn said.

Of course, home values ​​and demand vary by location, which affects affordability, Gumbinger said. “Being patient and being opportunistic is a good strategy for market conditions like this,” he said.

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