In June 2021 the 30 year fixed hit it’s lowest in history for a blip at 2.375% 30 year fixed owner occupied confirming loan limit which at the time was $546,000.
A mortgage of $546,000 at 2.375% 30 year fixed conforming rate gave you a payment of $2122.04.
If you were a high balance borrower you can go up to $822,000 at a rate of 2.625% and a payment of $3301.57.
Today these rates, not even a year later, are 4.375% and 4.625%.
Loan limits are higher at $646,000 and $970,000, but let’s use the same loan amounts to see the impact on a borrowers’ budget
Apples to apples on higher rates:
$546,000 at 4.375% is a payment of $2726.10
$822,000 at 4.625% is $4226.23
How does one absorb and qualify for this increase in payment?
For the conforming borrower the payment went from $2122.04 UP TO $2726.10 an increase of $604.06 with a max debt ratio under the Qualified Mortgage rules this means we need $1404 more in monthly income or $16,860 more per year in income to qualify. Base on rate increase alone not the other factors mentioned. At $2122 per month mortgage assuming $650,000 price so $670 per month tax and $80 for insurance the minimum income needed would have been $7180 now needed $8584, a 19.50% increase in income needed! That’s more than most raises. Also it’s 20% more in your income going to the housing expense even if you do qualify. At some point, as many times in the past, it will be cheaper to rent than own which will then soften the market.
Based on the high balance loan the payment went from $3301.57 to $4226.23 an increase of $924.66 per month which means the extra income needed to qualify is $2150.37 per month or 25800 per year in additional income needed.
Rates popping is not only a dollars thing but an emotional thing:
So it’s not just the number and debt ratio that count it’s the psychological effect of the increase is making buyers think harder about buying the property. The increase in rates will push some to act faster because they don’t want an even higher rate, and for some will discourage them and put them back on the fence about buying a home.
On rental properties:
What if this were a duplex you were buying for cash flow (rates now over 5% from the 3.25% of last year) in this price range losing $600 to $900 per month might make a good deal a bad one. Shifting you from positive to negative cash flow.
If we use the 1% rule on a $650,000 purchase price that’s $6500 per month in gross income.
If my mortgage payment is $600 more per month that’s 9.2% more –
if I was getting a 10% cash on cash return that wiped out my cash flow.
To keep my cash flow the same I would need to lower the price by $111,500 to recapture that $600 per month in cash flow.
$111,500 decrease on a price of $650,000 is a 17.1% decrease in price. YIKES!
Now what if rates go up to 6% on rental properties?
That would be a payment of $3273.55 or 547.45 ore than the 5% payment of $2726.10 – so another decrease of $111,000 or 17%
This is how we could see 20-40% declines in values.
ESPECIALLY on properties like multi-families that rely solely on the DSCR of a building.
To listen to the full explanation go to: