6% mortgage rates? Instead, watch your monthly payment

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This is Jon Reed from NextAdvisor, and the 30-year average mortgage rate and my taste in music have something in common: they’re both about the same as they were in 2008.

So that’s good news if you’re a pop-punk band living off streaming royalties, but bad news if you’re a homebuyer. Before last week’s mortgage rates, 2008 was the last time the average was above 6%, according to Bankrate. (Bankrate and NextAdvisor are owned by the same parent company.)

I wrote about the historical nature of those high mortgage rates in June and how, in the mid to late 2000s, a 6% rate was good. Today the world is different. These high mortgage rates come after years of record lows, and buyers are used to seeing 3% and 4%. They also come as homes are more expensive than ever.

Of course, your home loan rate is only part of a mathematical formula. You need to consider how this actually affects your cold hard cash, i.e. your monthly payment. Fortunately, we have a calculator for this.

Take, for example, a $400,000 home, which is the national average. If you were shopping last year, when mortgage rates were around 3%, you’d be looking at monthly principal and interest – not including insurance or taxes – of around $1,350 on a 30 years with 20% down payment.

Fast forward to today. Let’s say the house still costs $400,000, but the mortgage rate is 6%. Your principal and interest are now over $1,900. That’s an increase of about 30% for a house that costs exactly the same price. It’s just more to fund it.

That extra $550 a month hurts – a lot. This is why the housing market has slowed so sharply. That’s why the prices are starting to drop a bit. But if you are looking for a house, you may have to deal with this. Life doesn’t line up comfortably with the economy.

Experts have given us advice on how to manage these high rates. Here are some things that might help:

Shop for a mortgage. It’s basic, and something you should always do. You have the ability and the right to get quotes from different lenders and see who is giving you the best deal. It’s up to you to make them compete. Look at the fare, but also keep an eye out for fees and points – a lower fare can lead to upfront costs you can’t afford.

Stay within your budget. The monthly payment is the most important thing, so make sure you can afford it. Every variable that goes into buying a home – mortgage rate, price, fees, insurance, taxes – comes as a simple cost you pay each month. Do you like the house at this monthly rate? Can you afford it, comfortably, every month? Take it.

Look for a bargain. With fewer people looking for a home, you have fewer competitors for homes that are on the market. This means that you may be able to offer a price lower than the asking price or obtain other concessions from the seller. It also means homes stay on the market long enough for you to find them. There might be a deal there if you’re willing to settle for a home that’s good, if not perfect.

The important thing, no matter what happens next in the housing market, is to buy something you can afford. The future is difficult to predict. A fixed rate mortgage payment is not.

About Scott Conley

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