Mortgage Rates Just Hit a 20-Year High. Are Buyers Doomed?

It's getting increasingly difficult to afford a mortgage.

There's a reason so many buyers have struggled to purchase a home this year. Not only are home values still extraordinarily high, but mortgage rates have been climbing rapidly since the start of the year. And Freddie Mac just reported that the average 30-year mortgage interest rate has reached a 20-year high. 

If you've been in the market for a home, you may be wondering if this news is a sign that it's time to drop out. But if you're financially capable of buying a home, then you don't necessarily have to go that route. 

What do your finances look like?

Nobody wants to pay more for any given commodity than necessary. If your favorite cereal brand has always been available for $4.99 a box and all of a sudden you're looking at paying $5.49, you're apt to not be happy. But does that mean you should find a new cereal when that's your favorite? Probably not. 

Similarly, if you're ready to buy a home, and your finances support a home purchase, then an uptick in mortgage rates shouldn't necessarily drive you out of the market. In fact, if you've been house-hunting this year, it means you were already resigned to paying more for a home than in a regular market. And while you may not have anticipated such a steep jump in mortgage rates, the fact of the matter is that there are benefits to homeownership. So if you can afford a mortgage at today's higher rates, you may still want to sign one.

That said, keep in mind that your monthly housing costs, including your mortgage payments, property taxes, and homeowners insurance premiums, should not exceed 30% of your take-home pay. And if you're looking at added monthly costs like HOA fees, those will need to fall under that 30% umbrella as well. But if you can stick to that 30% threshold while paying a higher interest rate on your mortgage, then you may want to move forward with your plans to buy. 

Will mortgage rates keep rising sharply?

That's the big question, isn't it? And unfortunately, we can't answer it without a crystal ball.

Earlier this year, when the average 30-year mortgage rate was hovering around 3%, no one was predicting it would more than double within 10 months. Yet here we are. 

There's really no sense in speculating as to how high mortgage rates might get and when exactly they'll peak. But what we do know is that mortgage rates tend to rise and fall over time. And while they may be high right now, at some point, they're apt to drop. 

If you move forward with a home purchase now, you may have an opportunity to refinance to a mortgage with a lower interest rate down the line. So if you can swing those higher payments for the foreseeable future, you don't need to let higher borrowing costs stop you from meeting your goal of becoming a homeowner.