Why 7% Mortgage Rates Are Such a Pain

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(This article was originally published in NextMove, our weekly newsletter on the housing market. Sign up for it using the box below.)

The average 30-year mortgage rate is higher than it’s been in 20 years. Last week, it reached 7%, and it’s still inching higher. But the most startling thing might be just how quickly it got there. A year ago, it was 3.24%.

That’s a concerning jump if you’re a homebuyer, especially if you haven’t paid close attention to the market for the past nine months.

This is Jon Reed with NextAdvisor. It’s significant that mortgage rates crossed 7% for the first time since 2002, but a mortgage rate is only part of the cost of a home. Though home prices have started to tip downward, they haven’t fallen by much, making it crushingly difficult for many people to afford a home right now.

How much more difficult? The principal and interest on the typical American home, according to Zillow, is about $1,928 a month at today’s price and mortgage rate ($357,810 and 7.12%) compared to $1,083 a month at the price and rate a year earlier ($311,523 and 3.24%).

So while the price has risen 15%, the monthly payment is a whopping 78% higher.

That’s due to the squeeze of interest rates. The main culprit is inflation, reaching levels not seen in 40 years. That’s causing the Federal Reserve to ratchet up interest rates, making borrowing more expensive. The effect, which is somewhat intentional by the Fed and extremely painful for consumers, is that it’s a lot harder to buy a house.

So what do you do? Here are some tips:

Watch your budget. You may be in a situation right now where you’re ready to buy, and you can get a deal that fits your budget. That’s not a bad spot to be in: If rates drop in the future, you can refinance and save money. If they keep going up, you bought at a good time. The important part is to get a home you want and can afford.

Be choosy. A slower housing market means you can wait around for the right home at the right price. You likely won’t have anywhere near the level of competition seen just a few months ago. You might even be able to negotiate with the sellers to bring the cost of the house down, have them pay for a major repair, or have them buy down your mortgage rate with points. 

Save up. The Fed’s jacking rates up because it is trying to force Americans to spend less and save more by making borrowing a lot more painful – which hurts if you’re trying to buy a house. The silver lining in all this pain is that banks are offering better returns for savings. If you’ve got the time and patience, now is a great time to supercharge your future down payment by stashing more money away in a high-yield savings account. If the market turns for the better, you’ve got more cash to work with.