One Answer to High Mortgage Rates: A Smaller Home
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It’s no secret that there’s a national housing crisis post-COVID — high mortgage rates, steep prices, and a frustrating shortage of properties have made it pretty expensive to become a homeowner.
The data shows that renting is the more affordable option for many Americans right now, and that’s saying a lot, since rents aren’t cheap either.
So what can prospective homebuyers do? To adapt to this new normal, more people are buying a smaller, less expensive home, according to a recent analysis from the mortgage company Freddie Mac.
A lower price tag reduces the size of the down payment, loan, and monthly mortgage payments you’re signing up for — even with 30-year mortgage rates in the 6.5%-7% range.
Let’s say you buy a $300,000 home rather than a $425,000 home to make the 6.5% mortgage rate you’re offered more affordable. All else being equal, your monthly payment would drop from roughly $2,500 to $1,780, assuming a 20% down payment. (Brace yourself: $1,780 is what you’d be paying had you bought a $425,000 home back when rates were 3% in 2021.)
And there are other financial advantages: The less your home is worth, the lower your property tax and home insurance costs will be, generally speaking. You’re also likely to have lower utility bills (less to heat, etc.,) and there will be less space for you to maintain, repair, and furnish. Plus, smaller tends to mean more environmentally friendly.
The obvious downside, of course, is living with less space and less storage. You might outgrow the home sooner if you’re thinking about expanding your family.
And the demand for smaller homes can be particularly fierce, since they tend to be more affordable. In fact, about 35% of buyers of new homes said they’d be willing to downsize in exchange for a better price, according to one survey by the National Association of Home Builders.
So what? Mortgage rates have more than doubled since the pandemic and are expected to stay about this high through at least 2027. Compromising on space can be one way to afford the higher rates if you don’t want to hold off on buying. It might even be freeing to live with less stuff. Just be prepared for some tough competition.
Related Reading
• How To Track Down the Last Starter Homes in America (Realtor.com)
• The U.S. Is Facing a Severe Housing Shortage. Will Trump’s Proposals Help? (NPR)
• Is Now a Good Time to Buy a House? (Redfin)
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