Fed interest rate hikes hurt first-time buyers
First-time home buyers are working against the odds to land their dream home amid skyrocketing home prices, low availability, fierce competition and ever-rising mortgage interest rates.
Today’s news won’t help. The Federal Reserve raised its benchmark interest rate an additional 0.75% on Wednesday, the fifth hike this year, in a bid to reduce inflation. This will affect variable rate mortgages and home equity lines of credit, and could indirectly increase mortgage rates for 15 and 30 year fixed loans.
“Inflation is still hot and not coming down as fast as expected,” Greg McBride, chief financial analyst at Bankrate.com, said in a statement.
The average 30-year fixed mortgage rate climbed to 6.47% this week. That’s the highest since 2008, and it’s more than double the average rate from a year ago.
Housing, particularly rent, is a key driver of rising inflation, which hit 8.3% in August from a year ago, according to the US Bureau of Labor Statistics. While price increases for things like gasoline and plane tickets are slowing, housing costs are actually rising at an accelerating rate.
This is particularly detrimental to home buyers, as inflation and high mortgage rates contribute to reducing their purchasing power. When rates rise, the same home will cost buyers more than it would at a lower interest rate, forcing first-time buyers to re-budget, says John Cooper, a certified financial planner and former Carolina mortgage lender. from South.
Some are completely exhausted, while others lose their mortgage eligibility when they can no longer meet lenders’ strict debt ratios.
For example, a 30-year mortgage rate of 3% on a $350,000 home with a 3.5% down payment equals a monthly mortgage payment of $1,423, excluding taxes and fees. Everything else being the same, a 6.5% mortgage rate increases your monthly payment to $2,134, which equates to an additional $255,960 over the life of the loan, according to Bankrate.
First-time home buyers with Federal Housing Administration (FHA) loans also face higher rates. FHA-backed 30-year fixed-rate mortgages — which are intended to help low- and moderate-income first-time buyers by reducing down payments and closing costs — fell from 5.61% last week to 5 .71%, according to the Mortgage Bankers Association Weekly Poll.
That said, buyers dropping out of the market could be a boon for first-time buyers who can afford to keep shopping in limited inventory.
What first-time home buyers can do now
This monthly price difference has many potential buyers wondering whether they should try buying now or wait for lower rates. No one can time the market, but things may improve for buyers, if they can afford to raise rents.
“I believe mortgage rates will be lower in 12 to 24 months,” says Cooper. “If a homebuyer is willing to wait, the mortgage environment will most likely improve, meaning lower interest rates, during this time.”
Since first-time home buyers don’t have the equity from a home sale to compete with repeat buyers, they can also use this time as an opportunity to save a larger down payment. If they can save 20% of the purchase amount, buyers can avoid buying private mortgage insurance, which could save them hundreds of dollars each month, Cooper says.
Although today’s news may seem more daunting for first-time buyers in an already stressful market, those who are still determined to buy their dream home should consider applying for a mortgage pre-approval to show that they are a serious and prepared buyer, says Tom Goyda, senior vice president of consumer loans at Wells Fargo.
A pre-approval can also give the buyer a clearer idea of their potential loan amount, monthly payment, and interest rate so they can start budgeting their monthly expenses.
Overall, the most important thing a buyer can do is make sure they can comfortably pay their monthly mortgage payments.