In June, The Federal Reserve hiked interest rates by the greatest margin since 1994, with signals that these increases will continue as a means to fight inflation. These recent hikes have caused the 30-year fixed-rate mortgage to hover right below 6% as of late June, compared to just under 3% in June of last year.
Many experts believe that this may lead to a cooling of the housing market, currently experiencing record high prices. While this still remains to be seen, a potential drop in prices could cause many homebuyers to breathe a sigh of relief.
Prices in the Boston area over recent months are lower than their peaks, leaving buyers in a stronger position than earlier this year. However, realtors and lenders still need to manage homebuyers’ expectations. While an element of sticker shock might be removed when it comes to the asking price, increased interest rates mean homebuyers will be paying more monthly.
Lack of budget awareness persists
As such, those in the housing industry need to ensure that homebuyers have a realistic picture of their budget going into the process of purchasing a home. According to a recent survey by TD Bank, more than half (54%) of those looking to buy a home in 2022 had yet to establish a budget. Further, almost half of those who had bought a home in the last 10 years (including 62% of millennials) reported racking up over $2,000 in unexpected expenses during the homebuying process – demonstrating that many may be unaware of what the true cost of their home purchase will be.
Talk about finances early and often
TD’s survey also found that of those looking to buy their first home in 2022, only 22% had spoken with a lender. To avoid the budget concerns previously outlined, it is imperative to encourage homebuyers to speak with a lender as early in the process as possible – ideally, before they even start looking at homes.
A lender can help borrowers get a better picture of what they can afford overall, what their potential monthly payment could look like, how this will fit in with their other monthly expenses and how much they should set aside for closing expenses. While homebuyers may get excited by an online price drop alert for their dream home, they need to understand the true monthly costs now that interest rates are rising. Taking steps like these with clients can save agents time from showing homes outside of their client’s end-budget.
Lenders can also make sure that buyers have all their ducks in a row when they do find that dream home within their price range—ensuring they have all the needed paperwork and understand the requirements to secure a mortgage quickly. They can also recommend which types of mortgages make sense for one’s financial situation and their long-term plans for the home, as rising interest rates could change the total cost of borrowing.
Help buyers beat the affordability conundrum
As the hike in interest rates can impact affordability, it’s important that buyers are aware of their options. According to data from TD, 39% of recent homebuyers were not familiar with any mortgage affordability programs. Directing homebuyers, particularly those buying their first home or who are in the low-to-moderate income bracket, to available resources can help lessen some of the burden when it comes to their home purchase.
For example, several programs exist that allow first time homebuyers to pay as little as 3% for the down payment, freeing up cash for future monthly payments.
Amid continued inflation, today’s mortgage industry is extremely complicated for buyers who are managing affordability in multiple areas across their personal finances. As such, it’s vital for real estate agents and lenders to work together to ensure a smooth process and seamless home purchase that the buyer doesn’t regret later.
Maryruth Ryan
Regional Mortgage Sales Manager
Massachusetts
Maryruth.ryan@td.com