Consumers across the country have been braving an overheated housing market the past two years, with frantic buyers bidding up home prices to astronomical levels. Low mortgage rates, a pandemic-related increase in demand for home office space, and a housing shortage in many areas have all sent home prices soaring. In January 2022, for example, the median price for a home in the U.S. was $375,000; by June, it hit a record $450,000, an increase of nearly 17 percent, according to Realtor.com.
Recent increases in mortgage rates are taking some of the pressure off the housing market, but the fever hasn’t broken. Here’s what to expect going forward — and what you should doing if you’re planning on buying or selling a home.
Interest rate pressure to continue
With lingering pandemic-related supply-chain issues, high gas prices and the war in Ukraine, inflation climbed to 8.5 percent the 12 months ended July. In an effort to cool the economy — and inflation — the Federal Reserve has raised interest rates four times this year so far, and is expected to raise rates again in September.
Mortgage rates have risen sharply as the Fed has tightened monetary policy. Thirty-year fixed-rate mortgages were 3.22 percent in the first week of January 2022. By the first week of June, the 30-year rate had climbed to 5.09 percent. Assuming a 20 percent down payment on a $450,000 loan, the monthly payment on a 30-year mortgage financing $360,000 jumped from $1,301 to $1,999.
Lately, however, some experts say that housing market is cooling. Greg McBride, chief financial analyst at Bankrate.com, expects the Fed to keep raising rates to get inflation further under control. However, with the risk of recession rising every time the Fed hikes rates, mortgage rates are more likely to go down rather than up. “This is contingent on inflation peaking and beginning to show signs of easing. But if inflation continues moving to new highs, then all bets are off."
5 strategies for buyers
How might changing interest rates affect you if you’re 50 or older? Not much, if you’re paying down the mortgage on your home, says Lawrence Pon, a certified financial planner (CFP) at Pon & Associates in Redwood City, California. But if you're thinking of downsizing, it may be harder now, says Jason Siperstein, a CFP at Eliot Rose Wealth Management in West Warwick, Rhode Island. “This is due to interest rates and the fact that some real estate markets have gone up much more than others.”
An extreme example is Greater Boston, where the median home price has reached $900,000. Many young people with families can’t afford the larger homes empty nesters hope to sell. If they can sell, they face the problem of buying in an expensive market: Their only option may be to purchase a two-bedroom condo — at the same price as their home.
Despite market conditions, the need to downsize may be immediate. Or you may have to buy a home to relocate for a job or for health reasons. Maybe you’re a renter hoping to stabilize your housing costs. Here’s how to get best mortgage deal possible.
1. Focus on affordability. Before you start looking, reassess your priorities, Siperstein says. “That may mean buying a less desirable home than you originally imagined.”
Several factors will influence how much you can borrow — such as your income, spending, credit score, and down payment. Experts warn that your house payment shouldn’t exceed 25 percent of your income, though people often exceed that guideline. Aim for a lower percentage if you’re paying off student loans or other debt. A calculator like this one from Freddie Mac may be useful.
While the housing market in some areas remains frenetic, other areas are cooling off — and that means buyers have some room to negotiate lower prices, or at least reasonable repairs. (It also means that sellers might have to back off from pie-in-the-sky estimates when they first considered putting their home up for sale.) Don’t get caught up in a bidding war and get stuck with a much more expensive payment than you wanted.
2. Create a housing budget. Set up a budget that includes homeowners’ insurance, taxes, repairs, upgrades and maintenance. Next, figure your debt-to-income ratio. It's the percentage of your gross monthly income (before taxes) that goes toward payments for rent, mortgage, credit cards or other debt. A debt-to-income ratio of 35 percent is great. Above 43 percent, you might have trouble paying your mortgage, and lenders may balk.
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3. Beware of adjustable-rate mortgages (ARMs). ARMs are tempting because their initial payments are typically much lower than fixed-rate mortgages and might save you thousands of dollars over the life of your loan. But ARM payments increase or decrease, based on the terms of the loan and a benchmark rate index. Be sure to understand the terms, rules, fee structures, risks associated with ARMs, and how much your payments might go up each adjustment period.
With a 5/1 ARM, for example, the introductory interest rate would be locked in for five years before it can change — fine, if you plan to sell before the rate adjusts or if interest rates decline. But what if rates rise and your income doesn’t? While ARMs have caps which limit how much the mortgage rate can rise, if your payment goes up too far, you could lose your home.
During the 2007-2010 subprime mortgage crisis, banks offered low-rate loans to individuals with poor credit. Once the fixed-rate period ended and loans reverted to existing market rates, borrowers saw their monthly payments jump as their home values plummeted, and faced foreclosure.
4, Land the best fixed-rate loan. A fixed-rate loan may be safer. To snag the best rate, you’ll need to raise your credit score to 760 or higher by resolving any errors in your credit report and limiting the number of credit lines that you have.
Obtain quotes from three to five lenders to determine which has the best rates, fees and loan terms. Because rates fluctuate, lock in a rate when you apply for a loan. Calculate if it’s worth it to buy “points” to reduce that rate. A point is equal to 1 percent of your mortgage amount. Mortgage points are essentially a form of prepaid interest you can choose to pay up front in exchange for a lower interest rate and monthly payments.
5. Consider the alternatives. What if you have a low credit score or can only muster a small down payment? Look into government-sponsored FHA, USDA or VA loan programs that are designed for first-time buyers. On the other hand, if you can afford the payments, consider a 15-year fixed-rate loan. You’ll get a better rate and pay off your loan faster.
Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard and Poor’s.