How much more should you increase your real estate budget for higher interest rates?

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If you’re shopping for a home right now, you’re no doubt aware of two dynamics happening at the same time: record house prices and rapidly rising interest rates. If you started your home hunt a few months ago with just one budget in mind, you’ll probably have to throw away that old budget and create a new one based on the rising costs of buying and borrowing.

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In 2022 alone, the rate on a 30-year fixed mortgage rose to 5.65% from 3.29% at the start of the year, CNBC reported, citing data from Mortgage News Daily. To put these numbers in real dollars, your monthly mortgage payment would be $2,078 if you bought a $450,000 home at the current rate of 5.65% and put down a 20% down payment. At 3.29%, your mortgage would have been $1,575 per month, a difference of about $500.

Meanwhile, the typical value of a home in the United States as of July 8 is $349,816, according to Zillow. That’s about $328,000 in January, a gain of almost $22,000.

So if you started looking for a home at the start of the year and are still looking for the perfect home, your budget may have already increased by around $20,000 over the purchase price and $500 on the monthly mortgage payment.

Mortgage rates are expected to continue to rise this year as the Federal Reserve implements more interest rate hikes to help keep inflation in check, which is what most economists expect.

The only positive trend is that house price increases may finally subside. The most recent S&P CoreLogic Case-Shiller U.S. National Home Price Index, released on June 28, showed a 20.4% year-over-year gain in April 2022, down compared to a 20.6% increase the previous month.

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“April 2022 showed early (albeit inconsistent) signs of a deceleration in the rate of growth of U.S. home prices,” S&P DJI chief executive Craig J. Lazzara said in a statement. .

Despite the deceleration in the National Composite and a modest acceleration in the 10 and 20 City Composites, growth rates are still “extremely strong by historical standards”, he added.

When developing a family budget, many of the old rules still apply even as costs rise. As CNBC noted, a general rule of thumb is that your housing costs should equal about 30% of your income. This should cover the mortgage payment as well as property taxes, home insurance and maintenance. You can probably increase this percentage if you don’t have children, or decrease it if you have other heavy debts such as student loans.

You can also give yourself a little more leeway by working with lenders to get the best mortgage rate possible. This partly depends on your credit score. If your score is 740 or higher, you can probably get the best advertised rates.

Finally, making a larger down payment will lower your monthly mortgage payment, which means you can adjust your budget accordingly. But if you can only make the minimum down payment — like the 3.5% FHA minimum mortgage down payment — your monthly mortgage payment will be much higher.

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About the Author

Vance Cariaga is a London-based writer, editor and journalist who has previously held positions at Investor’s Business Daily, The Charlotte Business Journal and The Charlotte Observer. His work has also appeared in Charlotte Magazine, Street & Smith’s Sports Business Journal, and Business North Carolina magazine. He holds a BA in English from Appalachian State University and studied journalism at the University of South Carolina. His reporting has won awards from the North Carolina Press Association, the Green Eyeshade Awards and AlterNet. In addition to journalism, he has worked in banking, accounting and restaurant management. A North Carolina native who also writes fiction, Vance’s short story “Saint Christopher” placed second in the 2019 Writer’s Digest short story competition. Two of her short stories appear in With One Eye on the Cows, an anthology published by Ad Hoc Fiction in 2019. Her first novel, Voodoo Hideaway, is published in 2021 by Atmosphere Press.