The Cost of Owning a Home Is Rising

With average mortgage rates at an 8-year high, should you still consider buying?
Areal view of suburban homes

If you’ve looked lately at home prices in any major U.S. city, you likely got a dose of sticker shock thanks to a red-hot housing market that shows few signs of cooling off. And if that wasn’t enough of a setback for prospective homebuyers, now news comes that the cost of owning a home is rising.

In October, average mortgage rates reached 4.9%, the highest they've been since 2010, according to a new report from the Urban Institute. While it’s only an incremental increase over 2017's average rate of 4.1%, it could affect both current homeowners and would-be buyers.

What do increased mortgage rates mean for homeowners?

If you already own your home, you may be thinking, "So, what?"

After all, if you have a fixed-rate mortgage, rising rates have no effect on the amount you pay each month.

While that’s true, rising rates reduce the pool of people who will benefit from a mortgage refinance, since doing so could force them to forfeit the historically low mortgage rates they've locked in. Instead, homeowners who may need cash for a remodel or to pay off a high-interest debt will likely turn to a home equity line of credit (HELOC) to leverage the equity they hold in their homes without giving up their low mortgage rates.

But here’s the rub: Most lenders require you to have at least 20% equity in your home to qualify for a HELOC loan. With some homeowners paying as little as 3.5% down on their homes, it could take years of mortgage payments to reach that level of equity.

What do rising mortgage rates mean for prospective home buyers?

With mortgage rates on the rise, homebuyers may need to reassess their budgets. "Homebuyers seeking to purchase a home priced at $275,000 when interest rates were at 4% will see an increase in their monthly payment of approximately $150," said John Myers, a qualifying broker at Myers & Myers Real Estate in Albuquerque, New Mexico. "A homebuyer who could qualify for a $275,000 home at a 4% interest rate will now qualify for a home of approximately $243,000."

But despite average mortgage rates sitting at an 8-year high, it’s still considered low enough to be attractive to millions of Americans who dream of owning a home. "Five percent remains a very low interest rate for mortgages over the long term,” said David Reiss, a professor of law and real estate expert at the Brooklyn Law School. "They were over 7% in the early ‘70s and over 17% in the early ‘80s. Rates like today’s have not been seen for more than 50 years."

Reiss told ValuePenguin he believes that nearing the 5% threshold has more of a psychological impact than anything else, and that would-be homeowners should instead focus on how much house they need and can afford. "If the monthly cost is manageable and the house meets the needs of your family, then ignore this marker,” he said. “If you are not sure you can afford that cost month-in and month-out for the foreseeable future, then find something that is more manageable, whatever the interest rate you are offered."

Daniel Caughill

Daniel is a Staff Writer at ValuePenguin, covering insurance, retirement and other personal finance topics. He previously wrote about compliance and best practices for K-12 school districts at Frontline Education.

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