Bought a Starter Home in the Past Few Years? Here's Why It May Be Hard to Upgrade

If you bought a starter home during the pandemic, or even slightly before, you may find that the value of your home has gone up a lot. Median home prices have increased 33% since January of 2020, which means your house could be worth a lot more than you paid for it, depending on exactly when you bought it.

Home appreciation is a good thing and if your home has gone up in value, you may be excited to think about selling it so you can move onto your next phase of life. This is especially true if you bought the starter home with the goal of staying just a few years before moving up as your family grows or as you make more money.

There's a problem, though. It may be really difficult for you to sell and move, despite the fact that demand for your starter home could be pretty high.

Mortgage rates have a big impact on your housing costs

There's a very big problem for people who bought their homes in the past few years. While your home has likely gone up in value, something else has gone up, too -- mortgage rates.

After repeatedly hitting record lows during the COVID-19 pandemic, mortgage rates have been steadily climbing to recent record highs. The average rate for a 30-year fixed rate mortgage is 6.87% as of March 21, 2024. This is a huge increase from the below-3% rates that were available in 2021.

If you got a mortgage at 3.00%, or even 4.00% which was common pre-pandemic, then you have a very valuable asset -- an affordable home loan that's locked in for 30 years.

If you sell your house because you want to move out of that starter home and buy a new house that's a better fit for your current stage of life, it's going to cost you a lot more -- and not just because you're buying a bigger or more expensive house.

The higher mortgage rates are going to have a huge impact.

Here's how much high mortgage rates could hurt your efforts to upgrade your starter home

So, how much exactly will higher rates hurt you?

Say you bought a $300,000 home in June of 2021 with a 30-year fixed-rate mortgage for $240,000 at 3.00% and you can sell it for $360,000 in March of 2024. Your remaining loan balance would be $225,851.01. So if you sold your home, after around 6% closing costs, you could walk away with around $126,000.

Now, let's say you want to upgrade to a $500,000 house with $10,000 in closing costs.

• You'd have around $116,000 to put down after covering closing costs so you'd need to take out a $384,000 mortgage.
• If you could have paid that 3.00% rate again, your monthly payments would go up to $1,619, compared to the $1,012 you were paying before. If your income has gone up, that would probably be doable.
• But rates are at 6.87% -- not 3.00%. And if you borrowed $384,000 at 6.87%, you'd be looking at a monthly payment of $2,521. That's well over double what your starter home was costing you!

Most people's budgets simply can't bear that. Unfortunately, there's no clear answer for what to do about this -- other than staying put and hoping rates do come down in the future. You could also wait until your income goes up enough that you can afford the new home of your dreams.

For most people, staying put for now makes sense, so you may want to just hold on for a while and try to love the home you're in -- your current mortgage rate is at the most affordable level most of us are likely to see in our lifetimes.