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The Impact of Rising Interest Rates on Housing Affordability
Michael Neal / NAHB / August 5, 2013
According to Freddie Mac, the average interest rate on a 30-year fixed rate mortgage rose by 8 basis points over the week to 4.39%. Since the beginning of the year, mortgage rates have risen by about 1 percentage point and are now at a level last seen in August 2011.
The rapid rise in mortgage interest rates could affect housing affordability through higher monthly mortgage payments. However, monthly mortgage payments are not the only path by which rising interest rates can affect affordability. Homebuyers can instead decide to raise their downpayment amount in order to maintain an otherwise constant monthly payment in the face of rising rates.
Table 1 shows the impact of rising mortgage rates on downpayments for this scenario. As interest rates rise, homebuyers increase their downpayment in order to keep monthly mortgage payments roughly the same. However, the required increase in the downpayment, both in levels and as a share of the house price, declines as mortgage rates rise. If the downpayment remained at 10% even as mortgages rates rose, then the monthly mortgage payments on a $180,000 mortgage, $912 at a 4.50% mortgage rate, would rise to $994 if mortgage rates rose to 5.25% and to $1,079 if mortgage rates rose to 6.0%.