Rising mortgage rates mean home buyers now pay hundreds of dollars more per month

As mortgage interest rates have leaped upward this year, mortgage banker Patrick Lopez has seen a common problem among home buyers who get preapproved for mortgages — a strategy that real estate professionals recommend in a competitive market.

Preapproval allows buyers to show sellers that they have the funds for a quick settlement. The problem is mortgage rates have been rising fast and eroding purchasing power. For example, someone who was preapproved for a $200,000 loan in March, when the average rate was about 4%, could have just recently made a winning offer. But now that mortgage rates are above 5%, the buyer is approved for only a $180,000 loan.

Meanwhile, prices are moving in the opposite direction. Homes that would have gone for $200,000 are now $220,000.

“I’d say maybe 50% of the people are really struggling,” said Lopez of Quaint Oak Mortgage in Allentown. Higher rates combined with higher home prices, he said, “are just beating up buyers.”

Across the country, they are paying hundreds of dollars more a month than they would have if they bought at the start of the year, according to a LendingTree analysis released this month. On average, they’re paying $259 more a month, which means an extra $3,100 a year.

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Home prices are not rising as fast as they had been, but as they and interest rates continue to increase, demand will soften as more buyers are priced out of the market. That’s bad news for some buyers but good news for those who have the money to stay in.

“We’ll probably see the housing market cool a little bit from the craziness we saw through 2020 and 2021,″ said Jacob Channel, senior economic analyst at LendingTree.

» READ MORE: Fed hikes rates by half a percentage point in fight against inflation

That means prices will rise more slowly, homes won’t sell as quickly, and fewer will sell. But even with activity starting to slow compared with the last two years, he said, “it doesn’t mean things are going to be completely cooled off.”

“The housing market is still relatively hot,” he said. Bidding wars are still happening, and even with higher mortgage rates slowing home price growth, Channel doesn’t anticipate dramatic price drops anytime soon.

Record low rates of the last couple years spurred many people to purchase homes and many owners to refinance their loans to lower their monthly payments. These owners who have fixed rates won’t pay more as rates rise.

But it’s a different story for those looking to buy now. The average 30-year fixed mortgage rate was 5.3% the second week of May, according to the government-backed mortgage buyer Freddie Mac. That’s the highest it’s been since 2009. Six months ago, mortgage rates were in the 3% range.

“It’s a huge, huge difference,” Lopez said.

Quaint Oak Mortgage is preapproving an average of 15 buyers a week. Typically, those would result in five to 10 agreements of sale. Now that number is three to five. Buyers “are just not finding anything” in their price range, he said.

“There are so many people that gave up,” Lopez said. “Just said, ‘I’m out.’”

Buyers who do find homes will pay more a month. Mortgage holders who bought a home in New Jersey last month are paying an average of $325 more a month than if the house had been purchased in January, according to LendingTree. Pennsylvania mortgage holders are paying an average of $246 more a month.

» READ MORE: Low mortgage rates help home buyers as prices rise — if they can qualify (From 2020)

The average mortgage for New Jersey homeowners is about $380,000, according to LendingTree. The monthly payment for this size loan rose from $1,732 in January to $2,057 in April. In Pennsylvania, homeowners have average loans of $274,000. Monthly payments rose from $1,275 in January to $1,521 last month.

Many people don’t realize how much monthly payments can vary by lender, by homeowner, and by location, Channel said. New Jersey was in the top five states where monthly mortgage payments rose the most this year, according to LendingTree. The state has competitive housing markets, and because New Jersey can be an expensive place to live, many people have large mortgages.

“Across the board, lenders are raising rates,” Channel said. “But it just so happens that in some areas, like New Jersey, for example, rates are rising at a slightly higher rate. And when you add that to already high loan amounts, you’re going to end up with more expensive loans.”

Philadelphia so far has been relatively resilient to changes in the market. The rate of bidding wars in the area rose slightly this spring, while the national rate fell slightly, said Daryl Fairweather, chief economist at Redfin.

One reason may be Philadelphia’s reputation as an affordable city compared with many of its neighbors, she said. When high home costs push city residents out of the market, buyers moving from New York City and other more expensive places take their place.

» READ MORE: Hot housing prices may cool amid rising mortgage rates

In a notable development nationwide, sellers seem to be backing off just as much as buyers as mortgage rates rise, Fairweather said.

In the short term, many homeowners who refinanced and got lower monthly mortgage payments when interest rates were at record lows aren’t going to want to sell their homes just to have to buy again at higher rates. For the most part, choosing to sell will make sense only for owners who move to more affordable markets or downsize, she said.

» READ MORE: Black and lower-income homeowners missed out on the refinancing boom spurred by low interest rates

Fewer homes will come onto the market, but more homes will be for sale as demand cools and properties take longer to sell.

“All that means that we’re going to see a drop in sales,” Fairweather said, ”because neither buyers nor sellers want to participate in the market as much as they used to.”

Channel said he’s hopeful that by the end of 2022 and into next year, housing supply will climb upward from record lows. But it won’t be enough to meet needs.

Last year, economists predicted that mortgage interest rates wouldn’t exceed 4% in 2022. Then came rising inflation, Russia’s war on Ukraine, pandemic lockdowns in China, and lasting supply chain disruptions and labor shortages that conspired to raise mortgage rates.

Economists anticipate that rates will rise at least a bit more before the end of the year. In the first week of May, the Mortgage Bankers Association said that it anticipates mortgage rates to “plateau” somewhere around current levels.

“The odds of them going back down to where they were in 2021 are pretty, pretty small,” Channel said. “I don’t think people should hold their breaths for rates below 4% over the next few years.”