It’s tough to be a buyer in today’s market. You are facing rapidly increasing home values, fierce bidding wars, and a super low inventory of listings.
On top of it, mortgage interest rates have skyrocketed to above 5%, the highest in 11 years.
This means … housing affordability has plummeted.
How Housing Affordability Has Fallen by 18%
In February, I wrote an article on how housing affordability has declined with rising interest rates. In the meantime, interest rates are already 2 percentage points higher.
Last Friday, the rate for a 30-year, conventional mortgage has climbed to 5.625%, and to 5.75% for an FHA loan.
Here’s how much your monthly payment has increased:
Let’s assume you buy a typical Columbus home at the median sales price of $250,000. You pay 10% down and get a $225,000 loan.
- February 2022: interest rate: 3.75% – principal & interest: $1,042/month
- April 2022: interest rate: 5.75% – principal & interest: $1,313/month
Your monthly payment has increased by 26% in just 2 months.
And, your affordability dropped by 18.4%, because you can only afford a $204,000 purchase with the same $25,000 down payment.
Consider a 5-Year ARM to Lower Your Payments
One of the best ways to lower your monthly mortgage payment is to use an adjustable rate mortgage (ARM) instead of a 30-year fixed.
One of the loan officers we work with quoted a 5/1 ARM at 3.5%. That’s a full 2 percentage points lower than the 30 year fixed.
On an ARM your rate is fixed for 5 years. Then it may change up to 2%, which makes it equal to today’s 30 year rates.
The lender will also recast payments based on the lower loan balance, which means your monthly payments would not increase dramatically after 5 years.
How Should You Proceed?
I suggest you consider the 5/1 ARM over a 30 year fixed mortgage,
- if you don’t plan to stay in your home for more than 5 years,
- if you believe interest rates will drop when we hit a recession,
- if you are not worried about what will happen 5 years from now.
Nobody can predict the future, but we know that home values will continue to rise and so will mortgage interest rates.
Lock in your rate now!
Do NOT delay your dream of home ownership!