Here's How Much More Expensive Loans Are Getting for a $300,000 Home
- Mortgage rates are continuing to climb, with the average now sitting at 7%.
- Borrowers should expect higher monthly loan payments -- and budget for them accordingly.
Home buyers will need to prepare to pay up.
It's not just a lack of inventory and higher-than-normal home prices that are making today's housing market tough to navigate for first-time buyers and experienced ones alike. Mortgage rates have also been rising at a rapid pace. And recently, Mortgage News Daily reported that the average 30-year mortgage eclipsed the 7% mark.
Now to be fair, other mortgage trackers had slightly different numbers that came in below the 7% mark -- but not so much so. And given that the Federal Reserve is still in the process of raising interest rates, it's fair to assume that if you buy a home during the last quarter of 2022, you could easily end up paying 7% interest (or close) on a 30-year fixed loan.
Can you afford a mortgage at 7%?
Last year, it was possible to lock in a 30-year fixed mortgage at under or around 3%. Clearly, we're worlds away from rates that low.
So how much will a 7% mortgage rate cost you? Let's assume you're purchasing a $300,000 home and are making a 20% down payment -- a good thing to do if you want to avoid the added expenses of private mortgage insurance. In that case, a 30-year mortgage at 7% will leave you with monthly payments of $1,596 for principal and interest.
Keep in mind, though, that $1,596 will not include added homeowner expenses like property taxes and insurance, so you'll need to budget extra for those. And if you're buying a home that's part of a homeowners association, you'll need to factor in HOA fees on top of your principal and interest payment, too.
Now as a point of comparison, if you were to sign a 30-year, $300,000 mortgage at 3% interest, you'd be looking at a monthly payment of just $1,012 for principal and interest. So clearly, today's rates are putting buyers in a position where they have to spend a lot more to own a home.
Of course, it may be the case that you can afford the monthly mortgage payment that comes with getting a loan at 7% interest. If so, you may decide to move forward with buying a home, all the while keeping an eye on interest rates to see if refinancing makes sense down the line.
But either way, you should know that your total monthly housing payments (meaning, not just your mortgage, but also insurance, taxes, and HOA fees) should not exceed 30% of your take-home pay. And at today's borrowing rates, sticking to that threshold may be a more difficult thing to do.
When will mortgage rates start to come down?
It's really hard to say. Borrowing rates can fluctuate from week to week, so it may be the case that you can shave a little money off of your loan's interest rate depending on when you apply. But for the most part, it's fair to assume that rates will remain high for the rest of 2022, and possibly for a good part of 2023.
That doesn't necessarily mean you should put off homeownership until rates drop -- because that could be a while. But if you sign a mortgage anywhere in the vicinity of 7%, definitely pledge to keep track of rates so that if an opportunity to refinance presents itself, you're able to jump on it.
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