(NerdWallet) – The rate on 30-year mortgages has climbed rapidly to its highest level since 2019, around 4%. The increase could force home buyers to search for homes in lower price ranges. Some may need to be pre-approved again.
Mortgage rates have risen nearly one percentage point since the end of December. A few days before Christmas, the 30-year mortgage averaged around 3% APR in NerdWallet’s daily rate survey. On Tuesday, it averaged 4.03% APR.
Rising interest rates reduce purchasing power. Let’s say you can pay $2,000 a month in principal and interest on a mortgage.
- If you started looking for homes before Christmas, when the 30-year mortgage was around 3%, you could have borrowed around $474,400 to get a monthly payment of $2,000.
- But with a 4% mortgage rate, you could get a $418,900 loan with the same $2,000 a month in principal and interest. That’s an affordability reduction of about $55,500.
Rates have risen so rapidly that the effects can seem shocking and discouraging. Here’s what potential buyers can do to increase their chances of success.
Many buyers are encouraged to obtain mortgage pre-approval letters, which outline the amount the buyer is qualified to borrow at a certain interest rate. But when rates rise as quickly as they have in recent weeks, pre-approval letters become obsolete.
Even when a pre-approval letter says it’s good for 60-90 days, “that’s really irrelevant in a rate hike scenario, and you need to talk to your mortgage loan officer again,” says Shashank Shekhar , CEO of InstaMortgage.
Adjust price range
Higher rates can mean “you have to cut back a bit,” says Jim Sahnger, South Florida loan officer for C2 Financial Corp. “If you want a pool, you don’t get a house with a pool. Or you look at a house that’s not as renovated, but you know you’ll take care of it in time.
Find other ways to lower your payment
If you have cash in reserve, you may have other options besides narrowing your price range, says David Kuiper, vice president of mortgages for Northpointe Bank in Holland, Michigan. You may be able to pay discount points to get a lower rate, he says.
Or you could pay off some of your outstanding debt to improve your debt-to-income ratio, he says. This may increase the maximum monthly mortgage payment you would be entitled to.
Remember it could be worse
The last time the 30-year mortgage rate was higher was the week of May 23, 2019, when it averaged 4.06% in the Freddie Mac weekly survey. This is where it is desirable to relativize today’s mortgage rates: “Even at 4%, it’s a phenomenal rate,” says Sahnger.
Phenomenal compared to what? In Freddie Mac’s Weekly Rates Survey, the 30-year mortgage averaged 4.09% in the 2010s, 6.29% in the 2000s, 8.12% in the 1990s and 12 .71% in the 1980s. The average rate peaked at 18.63% in October 1981, and people were still buying houses at that time, presumably by wearing leggings and driving to Duran Duran.
But this rise in interest rates at the start of 2022 comes as house prices also soar. Affordability is likely to decline even further. “I’m not a pushy person,” Kuiper says, “but if buying a home is the right thing for you, better sooner rather than later.”