They Signed Contracts for Their Dream Homes Last Year. Now Their Borrowing Costs Are Ballooning.


Those who have agreed to buy an under-construction home, but have not yet closed, are facing mortgage-interest rates that can almost double what they estimated when paying their deposits.

New home buyers are facing several hurdles this year, from rising mortgage rates to building a home that is taking longer than usual due to supply-chain and labor constraints.

Many homebuyers who signed contracts for new homes in 2021 or earlier this year calculate monthly payments based on low-record-low mortgage rates of about 3% or less. But average mortgage rates have climbed up to 5.3% this spring, according to

Freddie Mac,

As the Federal Reserve began raising short-term interest rates.

The difference can translate into hundreds of dollars a month in mortgage payments — with buyers having the option of swallowing the extra costs or walking away from the deal and potentially forgoing the deposit.

Mortgage brokers and home builders say that borrowers are far more prepared to absorb the additional costs to maintain their purchases.

But the combination of rapidly rising prices for new construction and higher mortgage rates is likely to dilute the shopping pool for newly constructed homes in the coming months.

Buyers of existing homes face very low interest rate risk as they are usually closed within a month or two of signing the contract. Home buyers worried about sudden rate fluctuations can lock in the lending rate, often for a period of 30 or 60 days.

Buyers of new homes, which account for more than 10% of American home purchases, often sign contracts and pay deposits several months before their homes are ready.

Supply-chain issues have slowed construction times and delayed the closure of many homes for additional weeks or months.

With the average 30-year mortgage rate rising to 5%, home ownership may now be out of reach for millions more Americans. The WSJ’s Dion Rabouin explains the implications for potential buyers, sellers and the housing market. Illustration: Adele Morgan

“It introduces a lot of uncertainty and volatility into the consumer’s decision,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting LLC. “chances of [the buyer] Not being able to qualify for this house now has increased significantly.”

Builders can resell homes that have been out of contract to other buyers on their waiting lists, Mr Palacios said. But in an April survey by his firm, some builders reported that their waiting lists of potential buyers were shrinking due to the increase in interest rates.

Last summer when Lauren Sparks and Taylor Briggs paid off deposits on a new home with a yard in Savage, Minn., their loan estimate had a 2.875% interest rate. In January, he had the option of locking in the 3.75% interest rate for 75 days, but decided against it if construction was delayed beyond the 75-day window, Mr Briggs said.

“I had no idea the rates were going to explode as much as they were,” he said.

In February, the couple opted for a 45-day rate lock at 4.375% and paid more to reduce their interest rate to 3.625%, Mr Briggs said. The purchase closed in March.

Mortgage brokers and real estate agents say that most buyers are stretching their budgets rather than giving up on the purchase until they are unable to qualify for a mortgage at the current rate.

Many buyers who agreed to buy a home months ago are reluctant to back out of the deal and start buying again. The number of existing homes for sale is near record lows and home prices continue to rise rapidly every month.

Stephanie Dodu and Micah Barber, with their daughter Lyrica. When construction of his house was delayed and interest rates started climbing, he considered moving away.



visual:

jeff clark

Micah Barber and Stephanie Dodu decided last year to replace their Austin, Texas, home with a larger home on the same lot. He paid a deposit to a builder in September and October and expected construction to begin in January. When it got delayed and interest rates started climbing, he considered walking away, Mr. Barber said.

“There’s a fairly significant difference, when you’re borrowing a six-figure amount, in paying 3.5% and paying 5.5%,” he said. “I’ve lost some sleep.”

He initially intended to take out a fixed-rate mortgage, but switched to an adjustable-rate mortgage with a fixed rate of 3.75% for the first 15 years after the home was built.

In response to rising interest rates, builders are helping buyers lock in rates.

Taylor Morrison Home Corporation

chief executive

sheryl palmer

Home builders have seen more rate locks in the last 10 days, probably six, nine or 12 months, compared to the last five years, said on the April 27 earnings call.

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Mortgage broker Chris Robson in Fresno, California, said that many of his clients who are buying newly built homes are choosing either nine-month or 12-month rate locks, which are available for a price above the current interest rate. can be done.

In some cases, he said, buyers who prequalify at the lower rates need to pay off or refinance other loans such as car loans to remain eligible at the current rates.

Also, some workers have received pay increases since they were pre-qualified nine or 12 months ago, helping to offset the impact of the higher interest rate, Mr. Robson said.

After struggling to find homes in the Detroit suburbs, Bob and Anna Bergen signed a purchase agreement with a home builder in February. He expects his house to be ready by early 2023.

Bob and Anna Bergen are budgeting for a 5.5% mortgage-interest rate.



visual:

Rachel Wallace

“It’s exciting, but nerve-racking at the same time,” said Mr. Bergen. He hasn’t shopped for a mortgage yet, but he’s budgeting for a 5.5% interest rate. The couple plans to list their current home next year when the new home is ready.

“Financial uncertainty is, I would say, probably the highest point in any recent history, how quickly rates or the housing market could change,” he said.

Write Nicole Friedman et [email protected]

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