NAHB: Increase Your Down Payment to Combat Higher Mortgage Rates

August 9, 2013 2 Comments »
NAHB: Increase Your Down Payment to Combat Higher Mortgage Rates

Everyone knows mortgage rates aren’t as low as they used to be. In fact, they’re currently up about 1% from the ultra low levels seen back in early May, per Freddie Mac data.

The good news is that they seem to have settled in at their current levels, which historically aren’t bad at all. Still quite low.

However, with mortgage rates higher, prospective home buyers will need to come to terms with paying a little bit more each month.

That is, unless they buy down their interest rate, or alternatively, come in with a larger down payment, as the National Association of Home Builders pointed out earlier this week.

Unfortunately, many would-be home buyers seem to have enough trouble coming up with a minimal down payment, so gathering even more appears impracticable for most, especially with home prices also significantly higher than they once were.

Keeping Monthly Payments in Check

higher down payment

Check out the table above, which details how much more a potential buyer would need to bring to the closing table in order to keep their monthly mortgage payment from rising along with rates.

At the moment, rates on the 30-year fixed are around 4.5%, so a borrower putting down 20% on a $200,000 home would enjoy a mortgage payment of $811, before taxes and insurance.

However, if rates increased another half point, the down payment would need to be upped by about $9,000 to keep payments steady.

This is especially important if a borrower’s DTI ratio demands that monthly payments stay at a specific level. Without the higher down payment, they could be deemed ineligible for a larger loan amount set at a higher rate.

If a borrower were unable or unwilling to increase their down payment, the monthly payment would rise to roughly $859.

Assuming rates increased a full point to 5.5%, the down payment would need to be $57,000, up from the original $40,000 at 4.5%.

Otherwise, the monthly payment would be about $908, or roughly $100 more each month than the payment at 4.5%.

Tip: Another positive to a higher down payment is a lower LTV ratio, which should result in a lower mortgage rate in most cases (fewer pricing adjustments).

But Home Prices Might Just Fall Instead

home price impact

While the housing market in its current state might call for larger down payments, or larger monthly payments (your choice), there’s also the chance it could lead to lower home prices.

If buyers are turned off and/or not qualified for mortgages with higher rates on more expensive homes, prices may need to come back down.

As seen in the second table, bid prices could drop as mortgage rates rise, per the NAHB.

So a $200,000 home at 4.5% may only be valued at $191,500 if rates were to rise to 5.5%, and just $187,500 if rates keep climbing to 6%.

Of course, there’s no clear correlation between home prices and mortgage rates. While the obvious relationship is an inverse one, the pair often moves in tandem.

For example, when the economy is doing well, housing is typically doing well, or even the cause of the economy doing well, and if all is going well, interest rates are typically moving higher to control inflation (the money supply). So it may not play out as people expect.

Read more: Check out my mortgage payment tables to compare rates on the fly.

2 Comments

  1. Lemuel November 3, 2013 at 4:09 am -

    People barely have enough money for a 3% down payment, so asking them to come up with even more is out of the question IMO.

  2. Megan G. January 15, 2014 at 11:20 am -

    Yeah right. Why don’t the homebuilders lower their prices! How’s that for a solution!

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