What Rising Interest Rates Mean for Your Buying Journey

Key Takeaways

• Today’s mortgage rates are the highest they’ve been since 2018. There isn’t much you can do about mortgage rates, but staying informed about how your mortgage will be affected by them will make you a better prepared buyer.

• There are a few ways to raise your buying power: increase your down payment, improve your credit score, explore different loan options, and adjust your search parameters.

• To stay competitive in today’s market, buyers should sit down with their agent and loan officer to map out how rising (or falling) interest rates will affect your offer.

Mortgage rates are climbing. Since the start of the year, mortgage rates have increased by nearly 300 basis points. Experts predicted rates would rise in 2022, but no one expected such quick increases. While increases by the Federal Reserve and the war in Ukraine have some influence on the current landscape, rising inflation is the leading cause of the highest mortgage rates since 2018. While this will certainly impact homebuyers, there shouldn't be cause for alarm. Are you looking to buy a Vermont home and not sure what rising mortgage rates mean for you? Keep reading to understand how to stay competitive and understand the impact 5% rates will have on your buying journey. 

What does an increased rate mean for me? What is Buying Power?

When it comes to buying a home, there isn't much you can do about mortgage rates. Market pressure moves rates up and down daily. Nevertheless, it's still good to understand how mortgage rates impact your buying power.

What's buying power? Buying power defines how much home your mortgage can get you based on your current income and the current mortgage rate. Essentially how large of a principal a bank will loan you after considering costs like the interest charge, mortgage insurance, and taxes. So back in January, when rates were hovering around 2.5%, a buyer looking for a $250k mortgage would carry a monthly mortgage payment of approximately $1,004. For a home buyer who qualifies for a $1,100 monthly payment, the 2.5% rate works well. But as the rate rises, more of a buyer's monthly payment has to cover the interest charge rather than the principal. At 3.625%, monthly mortgage payments come out to $1,140. This is a tighter payment for our hypothetical buyer, but they might be able to swing it after tightening their belts. When we do the same calculation for rates at 4.625%, the monthly payment comes out to $1,285 - much higher than our buyer was prequalified for. For every point increase, it's about $140 in monthly payments. This will increase proportionally to higher home prices.

Consider this, every $10,000 more you want or need to spend on a home means $45 in monthly mortgage payments. In the scenario outlined above, the monthly payment increased by $281. That is 6x more than the original payment. In other words, the buyer lost over $60,000 in buying power. A buyer who qualified for a $300,000 home last year is only qualified for a $240,000 home today.

Recent Mortgage Increases

Mortgage rates go up and down every day. A lot of people think that the Federal Reserve sets the mortgage rate. This isn't the case. The Fed raises and lowers short-term interest rates based on long-term economic movements. Mortgage rates move independently based on market demand, which is influenced by the same economic forces the Fed is responding to. It might seem like they are directly connected, but there are many instances where mortgage rates drop even when the Fed increases rates.

So why are mortgage rates going up? Much like the price of gas, milk, and cars, rising inflation impacts the housing market. The cost of borrowing money skyrocketed as the country battles COVID-19, supply chain issues, and a massive shakeup in where and how people work. Most experts believe rates will continue to rise until inflation stabilizes. We should note that while rates rose dramatically over the last few months, historically speaking, rates are slightly above average. According to data from Freddie Mac, mortgage rates are back to pre-pandemic levels, and nowhere near the peaks we saw during the 2008 Housing Crisis. Since 2008, the average mortgage rate has sat close to 4%. Older readers will remember the 80's as a terrible time to borrow money with rates in the teens, while the 90s saw levels come closer to what we're experiencing today. 

One thing is clear. Today's rising rates aren't slowing demand. Vermonters across the State are still looking to buy and are getting prequalified to make offers. If you're looking to buy, make sure you understand how interest rates impact your buying power.

What are my options when I lose buying power?

You have a few options.

1. Increase your down payment. 

If you can put more money down upfront, your loan can go further. In addition, increasing your down payment means your principal will be smaller, lowering the risk to the bank. This can help you lock in more favorable terms or simply reduce your monthly payment.

1. Help your credit score.

Banks and loan officers consider your credit score and your income when prequalifying you for a loan. If you're not in an immediate rush to buy a home, make efforts to improve your credit score. 740+ will get the most competitive terms and rates. Also, consider your purchase history and credit reputation when considering a home purchase.

1. Explore different loan options.

There are a few loan options available beyond a conventional loan. From adjustable-rate mortgages to FHA and VA loans, there are many options available to home buyers who need some added flexibility or alternatives. 

1. Adjust your search parameters.

Talk with your Vermont Real Estate Company agent to ensure your search area matches your buying power. You can snag a home that matches your search criteria within your prequalified pricepoint by casting a wider net.

The biggest takeaway is to focus on your offer, not the interest rates, and stay competitive in multiple offer situations. If you were prequalified a few months back, now's a good time to talk to your loan officer to make sure you are still qualified at the price range you're searching for. 

Remember, your interest rate isn't locked in until there's a signed purchase and sale agreement. So if you think your search will be drawn out through the summer, then sit down with your agent and your loan officer to map out how rising (or falling) interest rates will affect your offer. 

Need help on your home buying journey? Our knowledgeable and friendly agents are happy to help you every step of the way.