Memo – Mortgage Rates Are Up 61% This Year – A CPA’s Perspective

This memo is meant for realtors, buyers and sellers. It will give important and somewhat sobering facts that will impact all of you. 

There are plenty of high level news reports about this, but I wanted to give some examples with hard numbers which I hope will give additional perspective.

Since the start of 2022, mortgage rates have been climbing. They are up 60.55% since December 31, 2021.

IMPACTS

I want to give you a perspective on how dramatically this impacts homebuyers’ ability to buy a house and therefore sellers’ ability to sell their homes.

Increased P+I payment.

In this example we will begin with someone approved for a 30 year fixed $240,000 mortgage at 3.27%. (the rate at 12/31/2021).

That principal and interest (P+I) payment is: $1,047 at 3.27%

The same P+I payment at 5.25% is $1,325, or $278 higher, or 26.55% higher. 

Potential Homebuyers who were cutting their debt to income ratios close in December, would now most likely not be approved at the current rates.

Increased Down Payment To Maintain Lower P+I

Let’s approach this problem from a different perspective.

Let’s say a prospective buyer cannot afford the higher P+I payment. That means they need to put more money down.

So let’s see how much of an additional downpayment is needed to maintain that principal and interest (P+I) payment of $1,047 at 5.25%.

The homebuyer needs an additional $50k downpayment in order to maintain the same debt to income ratio.

Our $240,000 mortgage has now become a $190,000 mortgage at 5.25% giving us a P+I of $1,049.

To give a similar example at a higher loan amount: $1,000,000

A $1,000,000 mortgage at 3.27%, has a monthly P+I of $4,363, and a monthly P+I of $5,522 at 5.25% giving us $1,159 more per month. 

This borrower would need an additional $215,000 down payment (loan of $785,000) to match the same P+I they would have had at the lower rates.

Thoughts

The lower end of the housing market will most likely be more greatly impacted than the upper end. But, what are the lower and upper ends? That is all relative to the area in which you are living. 

Any pre-approvals and pre-qualifications may no longer be valid, so all parties, realtors, buyers and sellers need to verify their validity. 

This only makes matters more contentious and anxiety inducing in our already volatile real estate market around the country.

Questions? Concerns? Call me on (732) 673-0510.