The 30-year fixed-rate mortgage averaged 5.11% in the week ending April 21, according to Freddie Mac. Mortgage rates were at 2.97% average this time last year. If you are in the process of buying a home, this could have a major affect on what you can afford.
The most important action for you, if you are in the process of buying a house, is to re-evaluate how much you can afford. With interest rates basically doubling during a few month time span, the mortgage that you were pre-approved for initially may no longer be applicable.
For example let’s say you are buying a $400,000 house with a 20% down payment (so we can take PMI out of the calculation). At a 3% interest rate you are paying about $1,600/month. (this includes an assumed number for insurance and property taxes). While at a 5% interest rate you would pay about $2,000/month. Imagine paying $400/month more than you had planned, that is a huge difference in cash flow especially the lower the income you have.
A rule of thumb is that you should only spend 28% of your gross income on housing, and mortgage companies want to keep your total debt payments under 43% of gross income. So this can restrict how much home you can afford. If you are in the process of buying a house, consider speaking to your mortgage broker to make sure you can buy the same priced house.