Do Rising Mortgage Rates Mean I Have to Buy a Cheaper House?

It may be time to rethink your price range.

Today's housing prices are higher than they've been in many years -- but that's nothing new. Home prices have been inflated since the latter part of 2020.

But whereas mortgage rates fell to record lows during the second half of 2020 and stayed low throughout 2021, this year, they've been on a steady climb. In March, rates rose sharply following news of the Federal Reserve's plans to implement multiple rate hikes in 2022. And recently, the average 30-year loan hit 5% -- a level not seen in years.

If you've been trying to break into the housing market for quite some time, perhaps you established a price range for buying a home based on 2021 mortgage rates. If that's the case, you may need to crunch some numbers and establish a new range to account for the fact that borrowing costs so much more these days.

How much house can you afford now?

As a general rule, your housing costs should not exceed 30% of your take-home pay. Now when we talk about housing costs, we don't just mean a mortgage payment itself. Rather, that figure should include your property taxes, homeowners insurance costs, HOA fees, if applicable, and private mortgage insurance, if that's something you're on the hook for.

So, let's imagine that late last year, you set an upper limit of $400,000 for home-buying purposes based on an $80,000 down payment and a borrowing rate of 3.8% for a 30-year mortgage. To end up with roughly the same monthly mortgage payment at a borrowing rate of 5% (which is what you might pay on a 30-year mortgage now), you'd need to limit your home purchase price to $360,000. That's a big difference.

Now this assumes, of course, you're limited to the same $80,000 down payment you started out with. If you've been trying to purchase a home since late last year but haven't had luck, maybe you've managed to sock away an extra $10,000 since then for home-buying purposes.

Or, it may be that you just got a huge tax refund that you're able to put toward a down payment. If that's the case, you may be able to stick with your original price limit of $400,000.

The point, either way, is to run those numbers now that mortgage rates are so much higher. You may end up needing to make some adjustments to avoid a scenario where you take on housing costs that are tough to manage.

Snag the lowest borrowing rate possible

In addition to rethinking your price range for buying a home, you should make an effort to shop around with different mortgage lenders. Now that borrowing rates are higher, it's important to eke out savings where you can.

Granted, rates are up across the board, so you're unlikely to find one lender willing to write you a 30-year mortgage at 3.9% when the average rate for that loan product is way higher. But you might manage to snag a 30-year mortgage at 4.8% or 4.9%, even with the average rate today being a little over 5%. Over time, that could amount to a lot of savings, so it's worth going after those better offers.