Mortgage Rates Are Just 5%. Here's How Much More Expensive Home Ownership Makes

Here’s a not-so-fun fact: The monthly mortgage payment required to buy a typical home in the US is now up a staggering 55% compared to where it started last year. That’s because of the dramatic rise in mortgage rates in recent weeks, on top of price gains in the hot housing market.

“It’s pretty crazy,” says Nick Cacciatore, who wants to buy a home in Tampa, Florida. “It’s very demoralizing.”

Back when Cacciatore checked last summer, mortgage rates were below 3%. This week they are up over 5%. That might not sound like much, but it makes a world of difference when you’re buying something as expensive as a house. And Cacciatore was looking for homes in the $600,000 price range.

“Monthly payments came out to about $700 a month,” he says. “I mean, a ridiculous sum from the interest alone.” And that’s not even factoring in the big price spike over the past year when he was trying to buy a home.

Cacciatore is a lawyer starting a family practice. His fiancé is a veterinarian. So you have good jobs and some savings.

But in this overheated housing market, they were repeatedly outbid. Now with higher mortgage rates, they’re looking for smaller, less expensive condos.

Some first-time buyers give up completely.

“It pretty much took her out of the market,” says Gabriela Raimander, a real estate agent in St. Petersburg, Fla. She says she spoke to a client the other day. “She told me with tears in her eyes,” says Raimander, “‘I just can’t compete in this market. “

Gabriela Raimander, a real estate agent in St. Petersburg, Fla., says most first-time buyers she works with give up. The combined effects of higher home prices and mortgage rates make home ownership unaffordable for many. (Gabriela Raimander)

Here’s the numbers for a typical home in the US: The median price for a home has increased to $357,300 from $309,200 in December 2020.

During the same period, interest rates rose from 2.67% to 5.08% this week. With a 10% down payment, this has increased the monthly payment from $1,124 to $1,742 – a whopping 55% increase. That’s over $600 a month for this $357,000 home. This is the effect of higher prices along with rising rates.

If you just look at interest rates — the 2% increase in interest rates we’ve seen so far adds $115 to the monthly payment for every $100,000 you borrow on a 30-year loan .

Online searches for “property for sale” are on the decline

The price shock is already affecting homebuyers.

Online searches for homes for sale are already down 10% year over year, according to Daryl Fairweather, chief economist at real estate brokerage firm Redfin. The number of people looking at houses has also decreased somewhat.

“So we’re seeing some very early signs that buyers are reacting to these higher mortgage rates,” Fairweather says.

Higher mortgage rates could finally cool down the hot real estate market

It might not be a bad thing. Finally, the overheated housing market could cool down and put an end to the hectic buying and bidding wars.

A slowdown in demand could give builders time to catch up. A record-low housing supply is a big reason prices have risen so sharply during the COVID-19 pandemic.

“I think the rise in home prices will slow down significantly,” says Fairweather. “We’re going to have a year of fairly flat house price gains in real terms.”

Of course, that’s exactly what the Federal Reserve is trying to do for the broader economy by raising interest rates. The Fed wants to cool rising prices and inflation by making it more expensive to borrow money.

It’s still unclear how much higher mortgage rates will go. Unlike credit card or other types of lending rates, mortgage rates move early and dramatically in anticipation of what the market expects, such as the Federal Reserve’s rates and its bond purchases next year. So mortgages could top out around that point, or they could keep going up.

In the Seattle area, Alex Bacon isn’t waiting to find out.

“We’re really excited to move,” she says. Bacon and her husband are preparing to sell their very small starter house, which they bought about five years ago. It was all they could afford, and it’s right under the Seattle airport approach path.

Alex Bacon and her husband Eli Leslie at their current home, which is very close to Seattle Airport. “I’m at the end of one of the runways right now, so the air just smells like jet fuel,” she says. The couple is trying to find a home to buy before mortgage rates go much higher. (Alex Bacon)

“I’m at the end of one of the runways right now, so the air just smells like jet fuel,” she says. “I can’t invite people to barbecues because you have to pause for 30 seconds in your mind every time you talk,” she says, as a 747 roars over her backyard.

After the pandemic, Bacon realized she could work remotely. She is a project manager at a medical technology company. So the couple’s plan was to move two hours north to a smaller, more affordable city and buy a larger home that wasn’t next to an airport.

But with interest rates rising, they hurry. They pack up and move as soon as they can buy the house.

The couple plans to sell their current home and move two hours north, near the Canadian border. The plan is to work remotely and be able to afford a larger house that isn’t near an airport and has space for home offices. (Alex Bacon)

“We’re starting to see interest rates around 5%, and I’m just so scared that if they get too much higher, we won’t be able to afford the house we want up there,” she says.

Your current house has increased in value in recent years, also with the airplanes.

This applies to anyone who already owns a home. They’re in a much better position than a first-time buyer because when they sell their home, they’ll likely have a nice chunk of cash for a down payment on a new location.