The already expensive 30-year fixed-rate mortgage got even more expensive this week. After Friday’s sharp rise in the Consumer Price Index, the rate for the most popular mortgage type rose from 5.62% to 5.86%.
According to Mortgage Daily News, it was one of the biggest one-day jumps in rates on record — and 5.86% is just the average. Homebuyers with lower credit scores can expect to pay well over 6%.
As recently as December, homebuyers were paying as little as 3% on a mortgage. The recent increase makes today’s house payments expensive enough to price many potential homebuyers out of the market.
Kate Wood, NerdWallet’s housing market expert, said that’s exactly what the Federal Reserve is trying to do – cool off the red-hot housing market to help ease inflation.
“The 30-year fixed-rate mortgage leaped the 5% threshold three weeks before May's 50 basis point rise,” Wood told ConsumerAffairs. “Since then, rates for the 30-year fixed have fluctuated but stayed above 5%. Even though we're anticipating additional increases to the federal funds rate throughout the remainder of the year, it's possible that mortgage lenders have already built these into their offered rates.”
The difference in a 3% and a 6% rate is significant: The payment on a $250,000 mortgage at 3% is $1,050. At 6%, it's $1,499 – an extra $5,388 per year.
Exploring other options
People determined to purchase a home in the near future are exploring other options. Adjustable-rate mortgages (ARMs) have become more popular because their average rate is currently below 4%. But, as the name implies, these rates can adjust over time — and they're currently moving higher.
Others are exploring 40-year loans. Financing a loan over an extra 10 years brings down the monthly payment, but it’s not without risk; with this option, you pay more in interest over the life of the loan.
“I have seen mortgage simulations where a borrower using a 40-year mortgage would pay in interest alone almost what they paid for the home – in essence, almost doubling the cost of the home,” Kristina Morales, a Realtor in Cleveland, Ohio, told us back in April.
Wood advises would-be buyers in this environment to shop carefully for a mortgage to secure the best terms. ConsumerAffairs has vetted the best mortgage lenders and gathered thousands of verified reviews to help you choose the right option for you.