Higher mortgage rates increase homeowner debt

In a recent report, the Consumer Financial Protection Bureau (CFPB) shows that the meteoric rise in mortgage interest rates in 2022 has already had a significant impact on homeowners, with borrowers in certain demographic groups reaching new levels of debt. Higher monthly payments can make it harder for mortgage borrowers not only to meet their financial obligations, but also to qualify for additional financing when they need it.

Key points to remember

  • The CFPB has released data for the first half of 2022 from the country’s largest lenders.
  • As house prices have risen at a staggering rate over the past two years and interest rates hit a two-decade high this year, mortgage payments have risen dramatically.
  • The federal agency points out that black, white Hispanic and Asian homeowners have been hit harder than non-Hispanic white borrowers.

Mortgage payments hit new highs

In June, the average monthly mortgage payment – excluding property taxes and insurance – reached $1,974, a 36.5% increase from an average of $1,446 in December 2021.

While house prices have increased significantly over the past two years, the CFPB notes that the average loan size has only increased by 1.1% over this six-month period, while the rate of average interest increased from 3.30% to 5.26%.

This increase in monthly mortgage payments has affected homeowners across all demographic groups, but the burden has hit some segments more than others, particularly when it comes to debt-to-income ratios.

The debt-to-income ratio (DTI) assesses the share of a borrower’s gross monthly income devoted to paying down debt. In June, the average DTI for Hispanic white borrowers exceeded 40%, while black borrowers saw an increase to 39.4%. DTIs also increased for white Asian and non-Hispanic borrowers, but the end result is lower at 39% and 37%, respectively.

Mortgage rejections with DTI reported as a reason also increased across the board, but were again more prevalent among black and Hispanic white borrowers. The rejection rate for both communities exceeded 45% at the end of the second quarter of 2022, compared to about 41% for Asian borrowers and about 35% for non-Hispanic white borrowers.

CFPB expects DTIs to continue to rise

Although third quarter data is not yet available, the CFPB expects DTIs to continue to rise for the remainder of the year due to rising mortgage rates and first half trends.

At the same time, the housing market has slowed considerably as housing has become less affordable.

The coronavirus pandemic has sent shockwaves through the housing market in the United States. As the demand for more space grew, coupled with a housing shortage, house prices soared, increasing at a stunning rate of 18.8% in 2021, according to the S&P CoreLogic Case-Shiller US National Home Price NSA Index. In September 2022, the index posted a year-over-year increase of 10.65%.

As house prices have seen unprecedented spikes across the country, the inflation rate has followed suit, hitting a 40-year high in June 2022, caused by a mix of rising demand, problems supply chain, a strong labor market and other factors.

Housing market conditions, along with high inflation and high 10-year Treasury yields, have all contributed to mortgage rates more than doubling in 2022. According to Freddie Mac, the rate of Average interest on a 30-year fixed rate mortgage started the year at 3.22%. At the end of October, it exceeded 7% for the first time in 20 years before falling again to 6.49% at the beginning of December.

If you’re planning to buy a home in 2023, keep track of mortgage rates and be sure to consider the potential impact of a higher monthly payment on your budget and credit opportunities.

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