Posted in: First time homebuyer tips, Buying a home, Getting a mortgage

How will rising rates impact first-time buyers?

first time buyer interest rates

There is no question that first-time buyers — whose budgets and down payments tend to be more modest — are deeply affected when mortgage interest rates increase. Here are insights you can use if you’re a first-time homebuyer in Minnesota or western Wisconsin.

How affordability works

Affordability is easier to understand when you can review a few examples. Let’s run the numbers.

Let’s say a homebuyer has $2,000 to spend on their monthly mortgage payment. If rates are 4 percent and the borrower secures a 30-year fixed conforming loan, they could take out a loan up to $419,000.

Now let’s say rates rise 1 percentage point to 5 percent. With all the mortgage terms remaining equal, the borrower would have to adjust their budget to $372,500 in order to remain in their $2,000 monthly budget. That’s a difference of $46,500, or an 11% reduction in buying power.

In other words, as interest rates increase, the borrower’s buying power is reduced.

A chart of how interest rates affect your buying power

Why first-time buyers will be affected most

Many first-time buyers do not have a large down payment, and government and private lenders have changed their standards in order to accommodate these high earners with minimal savings. FHA loans can now be secured for as little as 3.5% down, while conventional (private) loans have a minimum of 3% down.

While these new minimums have prompted many first-time buyers to enter the market, it also means these buyers are relying heavily on loan-based financing. In fact, first-time buyers financed nearly 93% of their home purchase in 2021, meaning that on average, these buyers had saved an average of 7% for their down payment. (Repeat buyers, meanwhile, put down an average down payment of 17%.)

If rates were to rise 1 percentage point, most first-time buyers would not be able to increase their down payment to make up the difference in affordability. If rates increase, their only choice will be to lower their home buying budget.

How buyers can combat rising rates

By boosting your down payment, you may be able to offset the impact of rising interest rates. If saving a large sum of money seems difficult or even impossible, consider:

Get help and advice on saving for a down payment.

Getting ready to buy

Prepping to buy your first home is an exciting time, and certain steps can put you in a better position with sellers. A pre-approval will tell you the loan amount you will qualify for, allowing you to set a responsible budget (and expectations) as you begin looking at properties online and in person.

Get pre-approved today, or contact us to get in contact with a local expert who specializes in your area.

Edina Realty Mortgage is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement
Prosperity Home Mortgage, LLC may operate as Prosperity Home Mortgage, LLC dba Edina Realty Mortgage in Minnesota and Wisconsin. All first mortgage products are provided by Prosperity Home Mortgage, LLC. dba Edina Realty Mortgage. (877) 275-1762. Prosperity Home Mortgage, LLC products may not be available in all areas. Not all borrowers will qualify. Prosperity Home Mortgage, LLC dba Edina Realty Mortgage is licensed in Minnesota and Wisconsin. Prosperity Home Mortgage, LLC is licensed by the Delaware State Bank Commissioner. Massachusetts Mortgage Lender License ML75164. Licensed by the NJ Department of Banking and Insurance. Also licensed in AK, AL, AR, AZ, CA, CO, CT, DC, FL, GA, ID, IL, IN, KS, KY, LA, MD, ME, MI, MN, MO, MS, MT, NE, NC, ND, NH, NM, NV, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV and WY. NMLS ID #75164 (NMLS Consumer Access at ©2022 Prosperity Home Mortgage, LLC.

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