by Christy Bieber | Feb. 9, 2021
Why is the size of mortgage loans climbing?
Americans are borrowing more money to buy homes. In fact, according to recent data from the Mortgage Bankers Association (MBA), the average purchase loan amount has hit a new record high.
There are a few reasons borrowers are taking out larger mortgage loans. If you're considering joining them, be cautious about how much you borrow. You don't want to get in over your head with this major financial obligation.
The MBA recently reported the average home loan for a new purchase hit a new record high of $395,200. Loan amounts have slowly climbed towards this record since April 2020.
There are two big reasons home loan amounts have gone up so much. The first is home prices have risen across the country. More people want to buy homes during the pandemic while fewer sellers are listing their properties. This has resulted in increased demand that coincides with lower supply. Obviously, this has driven prices up and created a seller's market. And when homes cost more, people have to borrow more to buy them.
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The other big reason for the loan increase is that mortgage interest rates have fallen dramatically in recent months, repeatedly hitting record lows. Rates have been driven down by the Federal Reserve's bond buying spree as the central bank has been purchasing billions of dollars in mortgage bonds per month. Since interest rates are lower, monthly payments are lower -- even with higher loan balances. This makes it easier for would-be borrowers to get approved for bigger loans.
It's natural to want to take advantage of today's unprecedented low mortgage rates and secure a home loan ASAP. But it's worth making sure of two things.
First, you don't want to overpay for a home. Obviously, you can't time the market, and no one knows if home prices will go up or down. But you still don't want to pay an unreasonable price for a property just because there aren't many for sale right now.
You also want to make sure you're comfortable with the amount of mortgage debt you're taking on. You need to consider both the monthly payment and total borrowing costs to confirm that you feel good about the amount you borrow.
It can be tempting to let the bank determine the size of your loan, but they'll lend you as much as possible based on your financial situation. The bank doesn't have a clear idea of what else you may want to do with your money, such as retiring early. They won't take all of these goals into account when assessing what's actually affordable.
The bottom line is, it may make sense to take out a mortgage and you may need to up the amount you borrow because home prices have climbed. But you shouldn't take out a loan of any size unless you're sure you're making a smart financial choice.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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