How to Figure Out If You Can Afford a House As Mortgage Rates Continue to Rise
Mortgage rates have been going up, up and up in 2022, making homeownership more costly — even if house prices level off. In fact, consumers may be in for serious sticker shock when preparing to buy: In June, mortgage rates posted the biggest weekly increase in 35 years.
With high rates and skyrocketing home prices painting a gloomy picture of home affordability, many consumers may assume homeownership is out of reach. But, a look back at historical mortgage rates may shed some light on “high” rates — and put some pep back in their homebuying step.
What rate is considered ‘too high’ to afford a mortgage?
“There is no one set rate that is considered ‘too high’ when you’re buying a home,” says Jacob Channel, LendingTree senior economic analyst. “Instead, the answer will depend on how much money an individual homebuyer can afford to spend on their monthly housing payments.”
Rather than focusing solely on mortgage rates, homebuyers should explore their budget to see if there’s enough room to cover all expenses after adding a mortgage payment. If the rate and payment leave you with the money needed to maintain your lifestyle and financial goals each month, then the rate may be acceptable.
Have mortgage rates been this high before?
The quick answer is yes — and they’ve been much higher throughout history.
Today’s rates are certainly much steeper than they were a year ago, when they ranged between 2.70% and just over 3%. They’re also higher than they were throughout most of the 2010s, when rates for 30-year fixed mortgages generally hovered between 3.45% and 4.87%.
Getting a mortgage rate in the mid-5% range may be jarring after the nonstop news about interest rates below 3% for most of 2020. But before the Great Recession of 2007-09, rates close to 6% were the norm.
How do consumers decide if homebuying is worth it now?
“Would-be buyers should make their homebuying choices based on whether they can afford a monthly payment at today’s rates and whether they’re ready for all the responsibilities of becoming a homeowner,” Channel says.
Those responsibilities include paying for a late-night plumber visit or repairs on a leaky roof, or replacing an air-conditioning system that fails on a hot summer day.
If — and more than likely when — rates eventually fall in the future, you can always refinance your mortgage to a lower rate.
Is it better to rent and wait until rates drop again?
Predicting mortgage rates is like predicting stock prices — they often rise and fall based on factors no one can see coming or going. And you might miss out on a great home at a good rate if you wait too long, Channel says.
It’s worth it to keep renting if you’re not ready to leap into homeownership responsibilities. A bonus: It may cost less to rent in some cases.
“Renting is also typically cheaper than homeownership — at least in the short term — and you shouldn’t feel like you’re necessarily missing out or wasting money if you chose to continue renting instead of buying,” Channel says.