Home ownership became more affordable this week as interest rates on 30-year fixed-rate mortgages fell below 7% for the first time since August.
After peaking at nearly 8% in late October, the average 30-year mortgage rate has fallen weekly since then. According to Freddie Mac, the rate is 6.95% as of Thursday.
With inflation easing, mortgage rates have fallen as the Federal Reserve is expected to cut rates in 2024. Most major lenders and real estate brokerage organizations expect 30-year rates to be somewhere between 6% and 7% in 2024.
For potential buyers who have previously been excluded from the real estate market, the reduced mortgage rate could provide the financial cushion they need to purchase a home.
Based on the new average interest rate of 6.95%, the monthly cost for a $300,000, 30-year fixed-rate mortgage would be $1,986. Compared to October's peak rate of 7.79%, that's a monthly savings of $172. On a $400,000 mortgage, the savings would be $229 per month.
Whether the reduced mortgage rate offers buyers enough flexibility depends on their income, savings and the purchase price of a home.
Unfortunately for buyers, home prices have continued to rise in 2023, which could offset interest savings in many markets. The median price of existing homes is $413,500, up 3.4% from last year, according to the latest data from online broker Redfin.
A common rule of thumb, the so-called 28/36 rule, states that a home is affordable if your housing costs – mortgage payments, taxes and insurance payments – do not exceed 28% of your gross monthly income. Your total debt, including your mortgage, other loans and credit cards, should also not exceed 36% of your gross monthly income.
If you're thinking about buying a home, you can use CNBC Make It's mortgage calculator to find out what your monthly mortgage payments would be based on the current 30-year interest rate.
Note that the calculator does not take into account additional costs such as insurance, property taxes and private mortgage insurance, which are typically required for mortgages with a down payment of less than 20%.