Rising Mortgage Rates Could Block a Third of Millennials
Mortgage rates hit a 2015 high when the national average on a 30-year fixed-rate mortgage hit 4.08 percent earlier this week, according to Freddie Mac's weekly survey. That's lower than the U.S. average at this time last year (4.12 percent), but home loan pricing -- rates, loans and fees -- has been on the rise for most of 2015, pushing homeownership out of reach for many Americans as the cost of a mortgage creeps up.
For example, if mortgage rates hit 6 percent, a third of millennials (people younger than 35 years old) wouldn't be able to afford homes as they're currently listed, according to an analysis by HouseCanary, a housing-data analytics company. Given that millennials make up more than a quarter of the population, their ability to buy homes will weigh heavily on the performance of the housing market, which has been driven by the baby boomers for decades.
Why do interest rates have such a huge impact on home affordability? Mortgages are huge loans, so a seemingly small shift in interest rates can change a borrower's monthly payment by hundreds of dollars (though going from the current 4.08 percent rate to 6 percent would be no small shift). Timing plays an important role in a borrower's ability to buy a house, but there's a lot more to home affordability than the economic factors. A consumer's credit standing will significantly impact the rate he or she qualifies for on a home loan, as does that consumer's outstanding debt obligations and down payment on the property.
As much as potential homebuyers should monitor mortgage rates before applying for a loan, preparing to enter the mortgage process requires much more planning. In the months and years leading to when you want to buy a home, prioritize paying down your debt and improving your credit score, in addition to avoiding unnecessary damage to your credit, like applying for new credit (that will slightly ding your score for a short time period) or running up balances on your credit cards.
If you're planning to buy a home soon, give your credit a thorough review to see if there's anything that needs your attention before applying for a home loan (you can start by getting your free credit report summary on Credit.com) -- and take the time to figure out how much home you can afford. You'll want to make the home-buying process as simple and surprise-free as possible.