The Federal Reserve announced last week that it will again raise rates by three-quarters of a point in an effort to combat the highest level of inflation seen in the United States in decades.
While the Fed does not control mortgage rates directly, this decision will undoubtedly influence the current mortgage rates available today. First-time homebuyers are having to deal with two major factors when finding an affordable home – rising rates and the sales price of homes.
The average sales price of homes is up 7.7% from last year at this time according to the National Association of Realtors. However, help is on the way for first-time homebuyers as sales have declined for seven straight months meaning we should start to see home values go down as demand continues to decrease.
Rates will be a key factor moving forward for many buyers in the market as it has significantly changed how much people can afford.
For each example below, we will use a mortgage loan amount of $350,000 to show how interest rates impact the monthly payment.
Conventional loans – loans backed by Freddie Mac and Fannie Mae – are the most used mortgage to secure a property. These loans are attractive to buyers because of the low down payment option of only three percent.
Currently, the 30-year average mortgage rate for a conventional loan is 6.68% according to Zillow.com. Last year at this time, the 30-year conventional rate was 2.88%.
If you financed a $350,000 mortgage at today’s 6.68% rate your principal and interest payment would be $2,235. The same mortgage at a 2.88% rate would yield a payment of $1,483.
The 15-year mortgage rate had a similar rise from 2.15% to 5.802% today.
FHA loans are loans backed by the Federal Housing Administration and are desirable to many first-time homebuyers due to their low 3.5% down payment and their typically lower rates than conventional loans.
The current 30-year FHA mortgage rate is 6.112%. At this time last year, the rate was 2.8%. The payments on these two rates have a similar increase like conventional loans.
The higher rate is $660 more expensive per month.
ARMs Could Be the Answer
When rates are higher than their averages, adjustable-rate mortgages (ARMs) offer some relief from the elevated interest rates.
These types of mortgages allow the borrower to lock in a rate that is below the current market for a period of time. After that period, the rate will adjust every 6 months or 1 year. A 5/1 ARM is a loan that has the same introductory rate for 5-years and it adjusts annually after that.
The current rate for a 30-year 5/1 ARM is 5.774%. A year ago, it was hoovering around 2.43%. Using the same loan size from above, you’re looking at principal and interest payments of $2,047 and $1,370.
While these two vary greatly like the other examples, the current payment on a 5/1 ARM is almost $200/month cheaper than the current 30-year conventional rate.
Borrowers with tight debt-to-income ratios and smaller budgets can greatly benefit from these loans and even purchase a little more home than they would have with a conventional loan. As a word of caution, borrowers should still look at the long-term impact of payments when the introductory period ends. If the payment is too much for the budget, it could leave a borrower with a debt load that is too large to handle.