The short version
- The average 30-year mortgage rate is 7.28%, up from 6.37% in May.
- On a median-priced new home, that's about $200 more a month.
- That $200 decides who qualifies, how much house you can buy, and what else you give up.
Rates are up, and buyers are pulling back
According to Freddie Mac, the average 30-year fixed rate is now 7.28%. It was 7.03% a week earlier and 6.34% a year ago. Early this summer, when most consumers start their home purchase process, it was 6.37%.
Higher rates are already making buyers pull back. According to the Mortgage Bankers Association, applications fell 6% in the week ending September 25. Purchase applications dropped 4% from the week before and are 14% lower than a year ago. The higher rates also hit refinance applications; they are down 56% from a year ago.
So why is demand falling? Let's do some math.
What does less than one point cost you?
According to the U.S. Census and U.S. Department of Housing and Urban Development, the median new home sells for $410,700.
Let's say you put down $80,700 and finance $330,000 on a 30-year fixed loan. Your principal and interest payment will be:
That's $200 more a month. Over a year, that totals $2,400, and about $72,000 more in interest over the life of the loan.
What does $200 mean?
1.It decides who qualifies.
Personal finance best practices suggest you keep your principal and interest payment at 28% of gross income. At 6.37%, you need about $88,000 a year. At 7.28%, you need about $97,000. If your household earns $90,000, you qualified in May, but you won't today.
2.You buy a less expensive home.
If $2,058 a month is your limit, that payment supports a loan of only about $300,700 today. That's roughly $29,000 less buying power: a $381,000 house instead of a $410,700 one.
3.You give up other spending.
If you still qualify, that $2,400 a year comes out of other spending. You'll have less to spend on your retirement goals or your annual vacation.
Dr. A's Take
A rate increase is similar to a price increase. Housing affordability declined over the past year. Couple these changes with increasing inflation, and it's no surprise consumer confidence is so low.
For the classroom: The house price didn't change, but the monthly payment rose $200. Why do economists treat a higher interest rate like a higher price?