Higher mortgage interest rates and mortgage insurance rates are making it harder for first time home buyers to get a mortgage in 2018. While the US economy is doing well, the higher rates make it more challenging for buyers with no equity in a previous property to be able to afford a home.
In popular metro areas such as Denver, buyers are hurrying to close a deal before the rates get much higher, which stand at approximately 4.7% as of May 2018. While these rates are low in historical terms, they are at least a point higher than last year.
In Dallas some buyers are moving further out to find homes they can afford, as prices in this area are going up as much as 10% per year. In Los Angeles, there is a massive home shortage and most homes that go up for sale receive several offers.
The problem with higher interest rates is that just a .5% higher rate can increase your monthly payment and add tens of thousands of dollars of interest payments over the life of a 30-year mortgage. In 2018, home prices are rising faster than incomes in much of the country and the higher rates can be more than enough to shut many first-time buyers out of the market. Plus, higher mortgage insurance costs are occurring as the hot housing market is allowing insurers to raise their rates as well. Mortgage insurance rates being higher also affects first time home buyers. If you put down less than 20% on your home, you must pay for mortgage insurance unless you have a VA mortgage. Most first-time home buyers have difficulty coming up with a 20% down payment, so higher mortgage insurance rates affect them especially.
First time home buyers can expect that a combination of low inventory, higher prices, higher mortgage rates and higher mortgage insurance rates will make it harder to buy a home in 2018. Some economists think the economic indicators mean US home sales this year will remain flat even though the economy is strong as a whole. For example, a buyer in Colorado highlighted by USA Today this month said that he put in 11 offers on homes and lost out every time to other buyers who offered more money. Rising rates made it harder for him to afford a home.
He said that the rates continued to climb, and the more it happens, the smaller home you have to buy. The man eventually settled on a new $370,000 townhome with an interest rate at 4.7% but he cannot lock his rate until later in May, so it is possible that he could have to pay more. Some industry experts think we could see 5% rates before the end of 2018. This could really put a damper on the housing market for first time buyers.
Right now, the national median home price is $225,500, which is 3.8 times the median income of $59,000. In cheaper parts of the country in the Midwest, it is easier for first time buyers to get into homes. In Pittsburgh, a median priced home is only $125,000 which is only 2.2 times the median income of the area of $56,000. But in Los Angeles and Seattle, the median price of homes is as high as $600,000, which is eight or nine times the median income of $66,000. This is putting first time buyers completely out of the market.
If you are a first-time home buyer and are worried about being priced out of the market with higher rates, mortgage insurance rates and higher prices, here are some tips:
- Ask your lender about first time home buyer programs. Some lenders work with state agencies to provide first time home buyers with rate discounts, help with down payments and educational resources. You may be able to find a grant to help you with your down payment, for example.
- Look for lenders that offer government backed loans. Government backed mortgages are good choices for many first-time buyers. They offer low rates and low-down payments. FHA home loans are great for first time buyers with 3.5% down payments and rates that are below market.
- Make sure you very carefully shop mortgage interest rates. You may be enticed by a super low interest rate in an advertisement. But this number often does not include all the closing costs and fees and could be for only the best credit borrowers. You are better off looking at APRs which have all costs figured into the number.
The reality is that it may be harder to find a home to buy in some areas of the country right now for the first-time home buyer. It really comes down to what part of the country you are in. But there are often options available to help you to get into a home loan you can afford so you can enjoy the American Dream.