Mortgage Rates Just Hit This Number — Here's What It Means
According to CNBC, 30-year mortgage rates hit 6.46% as of mid-May, well above the pandemic lows we saw about five years ago. That marks the highest level in five weeks, per CNBC.
While many aspiring homeowners are patiently waiting for real estate prices or rates to drop, we have to work with the current reality.
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How Do Higher Mortgage Rates Impact Aspiring Homeowners?
What does it mean that mortgage rates are well above 6%? Here's what it means for aspiring homeowners.
Younger Adults May Have To Save for Longer
Brett Johnson, a licensed real estate agent and owner of New Era Home Buyers, pointed out that rates like this hit harder than people may realize at first glance because their buying power erodes, leading them to avoid homes they felt comfortable looking at just months earlier.
“It’s not really the price that stops them, it’s the payment. Even a modest rate bump can tack on a few hundred dollars a month, and that alone can freeze a deal," he said.
Younger aspiring homeowners may have to save longer to afford a home, delaying this major life purchase.
“They don't have enough equity in a home to roll over into their down payment and, as such, finance a larger percentage of their purchase price," said Sain Rhodes, a real estate expert at Clever Offers.
Since a younger aspiring homeowner may not have an established credit history, they may choose to wait to build their credit score to qualify for a better rate.
You Have To Spend More Money on Interest
“It's hard to wrap your head around how big of an impact these numbers make until you put them into real-world figures,” Rhodes said.
Anyone purchasing a home at a higher mortgage rate will end up spending thousands more on their housing payments compared with someone who was able to lock in a lower rate. This means the household will also have less disposable income to allocate to other expenses, such as entertainment or home renovations.
Many Sellers Are Locked In and Limiting Inventory
The issue of locked-in sellers complicates matters further for aspiring homeowners, as many who are locked in to a low interest rate aren’t in a hurry to sell. Data shared by Realtor.com last summer pointed out that about 81% of outstanding mortgages had rates below 6%.
Rhodes explained that moving out means paying off a low-interest rate and buying another property with a much higher rate, which is forcing many to stay put.
What Can Aspiring Homeowners Do?
So considering all of this, what can aspiring homeowners do now?
Focus On What You Can Control
Johnson urged aspiring homeowners to focus on what they can control in this environment.
“Trying to time rates can be frustrating, and I have seen people sit on the sidelines only to face higher prices later,” he said.
If you can make the payment work today and the home fits your lifestyle, you can look into entering the market. If you can’t find a property, focus on building your credit score until you do.
Buy a Home at a Good Price and Refinance Later
Many first-time buyers make the mistake of waiting until interest rates drop significantly, but this could lead to a more competitive market. Rhodes explained that as long as you pay an affordable price for a decent home, you could go for it now and refinance once interest rates come back down.
She urged younger homeowners not to feel intimidated, as affordability can come from the right strategy rather than just interest rates.
Expand Your Search Radius
You may want to expand the home search radius and revisit the concept of a starter home. Rhodes said that buyers who find success in today's environment are those who are able to think outside the box.
Some common options include traveling a few extra miles from city centers and looking for something more affordable to build equity as a first-time buyer.
Take Advantage of Opportunities
The experts pointed out that buyers underestimate their leverage in this kind of market. With slower sales, sellers may be willing to make concessions or price cuts they wouldn’t in a more competitive market.
“Higher rates slow the pace, no question. But they also create these small openings for buyers who stay flexible and move when the numbers make sense," Johnson said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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