New-Home Buyers Face Rising Rate Surprises

A picture of five wooden house miniatures next to a wooden, jagged-shaped red arrow mimicking rate increases on a graph.

© Andrii Yalanskyi - iStock / Getty Images Plus

New-home buyers who signed a contract to purchase their home a year ago, when mortgage rates were 3% or in some cases less, are finding themselves caught off-guard as their homes near completion, as mortgage rates have climbed to 5.3% this spring.

They may face increases of hundreds of dollars on their mortgage payments.

Many buyers are trying to come up with the extra funds. But for some, it may be too large a difference, forcing them to walk away and sacrifice their deposit due to the rising rates, The Wall Street Journal reports.

New-home construction projects have seen rising material costs and delays. While projects were delayed, mortgage rates soared.

New-home buyers who signed contracts in 2021 calculated monthly payments based on near-record low mortgage rates. For example, Lauren Sparks and Taylor Briggs of Savage, Minn., told The Wall Street Journal they put down a deposit on a new house last summer. The loan estimate at the time was 2.875%. In February, they received a 45-day rate lock at 4.375% and paid more up front to lower their interest rate to 3.625%.

Last week, the 30-year fixed-rate mortgage averaged 5.3%, according to Freddie Mac. As a result, the monthly mortgage payment has increased by about $520 since the first week of January, when rates averaged 3.2%, according to a recent blog post at the National Association of REALTORS®.

Existing-home buyers tend to face less risk from mortgage rate spikes, since they tend to close within a month or two of signing a contract. Buyers of new homes sign contracts and pay deposits several months before their homes are complete.

"It's just introduced a lot of uncertainty and volatility into the consumer’s decision," Rick Palacios Jr., director of research at John Burns Real Estate Consulting LLC, told The Wall Street Journal. "The chances of [the buyer] no longer being able to qualify for this home go up significantly."

When homes fall out of contract, builders can resell them to buyers on waiting lists, Palacios says. But those may begin to shrink due to rising costs.

In some cases, builders or lenders are helping buyers lock in rates for longer periods to help shield them from the increases. For example, Taylor Morrison Home Corp. said during a recent earnings call that it has seen more rate locks of six, nine, or 12 months in the past 10 days than in the last five years.