Mortgage payments grew by more than $100 per month this year — thanks largely to the unrelenting rise in mortgage rates.
The national median monthly payment for a borrower rose to $1,897 in May, up $513 in the last five months, according to the Mortgage Bankers Association (MBA). That marks an increase of 37.1%.
The rapid rise underscores the housing affordability issues dominating the market with many homebuyers, especially first-time ones, pushed out of the market. And there’s little hope for relief soon as mortgage rates this week edged even closer to 6%.
“The ongoing affordability hit of higher home prices and fast-rising mortgage rates led to a slowdown in purchase applications in May,” Edward Seiler, associate vice president and executive director at the MBA's Research Institute for Housing America, said in a statement. “Inflationary pressures and rates above 5% are both headwinds for the housing market in the coming months.”
The median list price for a U.S. home was $447,000 in May — up 18% since May 2021. It's about 65% more expensive to finance 80% of the median-priced U.S. home now than a year ago, according to Fannie Mae. Add in rapidly rising mortgage rates, which increased to 5.81% from 5.78% last week.
The conditions are especially difficult for first-time homebuyers who typically have smaller down payments and are often contending with surging rents. For instance, the national median mortgage payment for FHA loans — a popular option for entry-level buyers — was $1,430 in May, up from $1,005 a year ago, according to MBA.
“While solid income and job growth are helping to offset some of the decline in affordability, potential homebuyers are facing significant financial headwinds,” David Berson, chief economist at Nationwide Mutual, told Yahoo Money. “Moreover, with inflation still extremely high, the Federal Reserve promising significant rate hikes in the coming year, and not much sign that rapid house price gains are slowing, affordability is likely to worsen as the year progresses.”
As a result, more and more homebuyers are turning to adjustable-rate mortgages, or ARMs, that offer a lower initial rate. For instance, the average rate on the five-year ARM was 4.41% this week, almost 1.5 points lower than the rate on the 30-year home loan.
There’s even been talk in the industry of introducing a 40-year fixed mortgage to address the affordability crisis.
Buyers also have a number of tricks to mitigate increasing rates and higher prices, such as locking in rates and buying points.
“Buyers should expand the different options they’re looking at and get familiar with programs they may not previously have been aware of … [those] designed to better-facilitate lending to qualified buyers across different income levels,” Robert Heck, vice president of mortgage at Morty, told Yahoo Money. “Knowing how the home you choose will impact your mortgage rates, closing costs, and program eligibility is another way to help better plan for the all-in cost of buying a home.”