I wanted to talk to you guys about something that’s been weighing on my mind a lot recently. You see—it’s about to get really hard to buy a house.
Now, you should know that my goal in creating this channel has always been to help others’ on their own personal finance journeys—and a big part of that is helping people find a path to homeownership through education on building credit and education on the mortgage process in general.
I hope that by making these videos I can make the whole home buying process a little easier, less intimidating, and less confusing for you. I want to let you know that home ownership IS still possible for you today. After all, there’s always a way, you just have to find it.
Unfortunately—even though there is always a way—it’s starting to look like it’s going to get a lot harder for a lot of people to get a mortgage in the near future.
Mortgage Payments
You see, one of the most important deciding factors in determining how much your monthly mortgage payment will cost and ultimately how much house you can afford is about to change, and not necessarily for the better.
It’s important to know that mortgage payments are not static; they are ever-changing. Year-by-Year, they may go up or down. This is because mortgage payments are made up from a number of variables including:
- Your principal loan payment (this is the part of your payment that goes towards paying down the balance remaining on your loan),
- PMI (Also known as personal mortgage insurance, which is meant to protect your lender if you stop making payments and default on your loan),
- Homeowner’s Insurance (which is meant to protect you and your assets, as well as your lender’s investment if damage should occur to your home),
- Property Taxes (These taxes are paid to your local municipality—your city and/or your county, and they contribute to general funds for things like public schools, road maintenance, police and fire departments, just to name a few,
And most notably right now, mortgage interest.
Mortgage Interest
Mortgage interest is the extra money lenders charge you to borrow money from them— It’s the cost of your loan. You have to pay money to borrow money and that’s how lenders make their money while staying in business. You borrow a flat-rate and they charge you an extra percentage rate on top of that as a fee.
As it turns out, from the moment you begin your home search,
to the moment you make your final mortgage payment years down the road; your mortgage interest rate will play a heavy hand in determining your monthly payment; and ultimately whether or not you can afford to buy a home at all.
When mortgage interest rates decrease, homes are more affordable, and more people are able to qualify for home loans.We saw this in the beginning of the pandemic when mortgage interest rates plummeted to near decade lows.
When mortgage rates increase, many buyers are priced out of the market all together and no longer qualify for loans. I’m sorry to say, this is something we are already starting to see happen right this very second.
Fed Rate
But mortgage rates don’t just go up and down on their own—and lenders don’t just decide on rates willy-nilly. No, mortgage rates are instead heavily influenced by the Federal Funds Rate.
The Federal Funds Rate is the interest that banks charge each other to borrow or lend their reserves. When the Fed Funds Rate increases, we almost always see an increase in mortgage rates too.
Just about two weeks ago, the Federal Reserve announced that they expected to raise the Federal Funds Rate by 25 basis points during each of their 7 committee meetings just in this year alone.
Not gonna lie here—while there are pros and cons to this situation, hearing that announcement sent a cold shiver down my spine.
Because—at the very least, that will leave us at 6% in mortgage interest rates, if not higher. These are rates we haven’t seen since I was a tween in the very early 2000’s. Coupled with the absurd rise in home prices nationwide during the pandemic, it’s no wonder how so many feel so helpless.
Mortgage Rates
Sure enough though—after the Fed made their announcement about the rate increase—seemingly overnight, mortgage rates increased by nearly 25 basis points to 4.53%. A week later, the national average for a 30-year fixed rate mortgage rate is sitting at 4.86% and edging nearer to 5% every day. And, it’s probably not going to stop any time soon.
Scenarios
So what happens from here on out?
According to this article from Bankrate, there are 3 possible Scenarios:
Scenario number 1:
Just like the Federal Reserve said they would, they will keep raising the Fed Funds rate to help battle high-inflation. This would result in continually increasing mortgage interest rates. Possibly as high as 6 or 7% based purely off of the facts we have at this moment.
Scenario number 2:
The economy begins to respond to the actions that the Federal Reserve took by increasing the federal funds rate, inflation starts to slow down, and mortgage rates stop climbing but instead of falling, they plateau.
Scenario number 3:
After the Fed continually raises rates in order to finally get a handle on this high inflation we’re all experiencing right now, the economy shrinks and the United States is living through yet another recession. If this were to happen, we’d likely see mortgage rates fall relatively quickly.
Now, even before I read this article, my gut was telling me that Scenario Number 1 is the most likely scenario to play out in the near future. The author acknowledges this scenario as most likely as well.
They also note that we may be likely to see Scenario Number 3 play out in as early as 2023 after the events of Scenario 1 play out.
Consequences
So what does this all mean for you?
Truth be told, it’s not very good.
High mortgage interest rates affect everyone from first-time home buyers to upsizers and downsizers, and even sellers.
For sellers, it means that your home equity may plateau and potentially fall as there are less buyers competing for homes available on the market.
As a buyer it means that you may be priced out of the market area that you were originally considering, and that you have to buy further away than you were expecting. It may also mean that you have to purchase a smaller home than you’d originally planned for. And finally, it means that you might no longer even qualify for the loan that you needed.
What to Do About It
But all hope isn’t lost.
When things don’t go to plan, we have to pivot.
It’s how we keep going.
It’s how we eventually reach all of our goals.Look at your plan, and reassess.
Maybe you buy in a more affordable area that’s a little further away.
Maybe you find a source of supplemental income to help increase your down payment—a second job or a side-gig.
Or, Maybe you buy a year later than you expected and keep saving along the way.
Whatever the case, do what makes sense for you.
Wrapping Up
I know that this all can be a tough pill to swallow for a lot of people—considering how these drastic changes in the economy can all affect us and our dreams on an individual level.
But—I’ve always believed in being prepared. That’s how we finally get ahead. We need to always be learning what the possibilities are now, so that you can get ready, get prepared, and keep carving out that pathway to our dreams.
Remember, there’s always a way, you just have to find it!
References:
Scenario Reference: https://www.bankrate.com/mortgages/the-fed-tackles-inflation-scenarios-for-mortgage-rates/amp/
First Rate Hike since 2018: https://www.wsj.com/articles/fed-raises-interest-rates-for-first-time-since-2018-11647453603
Fed Funds Rate Definition: https://www.investopedia.com/terms/f/federalfundsrate.asp
The Fed Announces Rate Increases: https://www.cnbc.com/2022/03/16/federal-reserve-meeting.html
Mortgage Rates: https://www.bankrate.com/mortgages/todays-rates/mortgage-rates-for-tuesday-march-29-2022/
Oh Hey, It’s Ray is a real estate investor, entrepreneur, and former real estate agent. She lives happily with her husband and two children in the Pacific Northwest. See more from Ray at her YouTube channel and on Ohheyitsray.com