Mortgage rate volatility may have home shoppers unsure of how to plan for costs. A report from Realtor.com shows how potential buyers can “rate-proof” their housing budget to avoid getting caught off guard if mortgage rates rise closer to their purchase.
To help set a homebuying budget, buyers can use these rate ranges, which reflects about 80% of historical rate changes:
- 12 months out from a home purchase: Use today’s rate +/- 100 basis points
- 6 months out: Use today’s rate +/- 75 basis points
- 3 months out: Use today’s rate +/- 50 basis points
Related: What 7% Rates Could Mean for Home Buyers
An Example of How This Could Affect Payments
Mortgage News Daily reported that the 30-year fixed-rate mortgage averaged 7.19% on Sept. 22. Using that rate as a starting point, buyers could then use a mortgage calculator to see how different rates could affect their purchasing power.
- Buying in 12 months: Plan for rates between about 6.19% and 8.19%
- Buying in 6 months: Plan for rates between 6.44% and 7.94%
- Buying in 3 months: Plan for rates between 6.69% and 7.69%.
“Buyers looking to purchase in one year should be ready for anything between a mortgage rate of about 6% and one of about 8% based on today’s rates and historic volatility,” writes Joel Berner, senior economist at Realtor.com.
For example, a buyer with a $2,000 monthly budget for principal and interest who was planning to buy in a year may want to leave enough room for a mortgage of about $327,000 at 6.19% but would only have about $268,000 at the higher rate. That’s a difference of nearly $60,000 in purchasing power based solely on possible changes to the interest rate over a year’s span.
The range narrows as the purchase gets closer. At six months, the same $2,000 monthly budget would support a loan of about $318,000 at the lower 6.44% estimated rate versus about $274,000 at 7.94%—a difference of about $44,000.
At three months, the difference falls to about $30,000, with the $2,000 budget supporting about $310,000 at 6.69% versus $281,000 at 7.69%.
For Buyers Willing to Take on More Risk
The calculations change for buyers willing to take on more risk. Realtor.com also calculated a narrower range that historically would have captured about 50% of mortgage rate outcomes:
- 12 months out: Use today’s rate +/- 40 basis points
- 6 months out: Use today’s rate +/- 30 basis points
- 3 months out: Use today’s rate +/- 20 basis points
This Isn’t a Prediction of Mortgage Rates
The report isn’t forecasting where mortgage rates will go. Instead, Realtor.com researchers looked at monthly changes in Freddie Mac’s 30-year fixed-rate mortgage since 2000 to quantify how much rates have historically moved—up or down—over three-, six- and 12-month periods.
Mortgage rates remain subject to a range of economic forces. Lawrence Yun, chief economist at the National Association of REALTORS®, says to expect 7% mortgage rates “as the new normal,” but says rates could eventually move lower if oil prices retreat, the federal budget deficit is reduced and productivity gains from artificial intelligence help ease inflation. He cautions, however, that those developments are uncertain in the near term.
As such, the historical range can give buyers a framework for preparing their budgets. “Buyers need to feel some reassurance that purchasing the home of their dreams is not out of reach,” Berner says. “They need some guidelines about how to plan for rate volatility in the months leading up to their purchase.”
