Mortgage rate spike changes house-hunting strategy

As mortgage rates climb, the desire to own a home hasn’t diminished for financial advisers’ young clients, but they are beginning to reassess the kind of home they’re pursuing.

Last week, a 30-year fixed mortgage reached 5.12%, its highest point since February 2011, according to Bankrate.com. That adds one more challenge for first-time buyers, who already are facing sky-high home prices in much of the country.

“In our experience, from a financial planning standpoint, very little has changed,” said Harris Holzberg, owner of Holzberg Wealth Management. “Rising mortgage rates do not eliminate the need and desire for people to purchase housing. What does change is the kind of house which someone can afford.”

That may force some hopeful buyers to downsize their dream home.

“They’ll have to buy less of a home or save more to put more down,” said Melinda Satterlee, owner of Marathon Wealth Management.

The jump in mortgage rates, which had been below 3% last year, could tack nearly $1,000 per month on some mortgage payments, said Thomas Kopelman, co-founder of AllStreet Wealth.

“You may have to reevaluate the type of house that you can afford,” Kopelman said. “That’s never fun, but the last thing you want to do is over-leverage yourself into a house.”

Young clients who were considering a $600,000 house may have to think about setting their sights lower, maybe to $550,000 or $500,000, said Paresh Shah, managing principal of PareShah Partners.

Once the higher mortgage is taken into account, though, the price tag may still be more than they can afford without beefing up their finances.

“They need additional savings for the down payment and additional cash flow for the monthly mortgage payment,” Shah said.

Home buying is often as much of an emotional decision as a financial one. It’s unlikely that higher mortgage rates will stop potential buyers in their tracks, but they may have to change their hunting pattern to find an affordable home.

“The secret is to keep looking until you find it,” Holzberg said. “Don’t be discouraged in your home search. Just because interest rates go up, it doesn’t change the financial plan, it only changes your options.”

With mortgage rates rising, Chris Diodato, founder of Wellth Financial Planning, is no longer counseling his young home-hunting clients to keep their down payments low and invest the extra cash in stocks.

“That doesn’t make as much sense now,” Diodato said.

The bright side of higher mortgage rates is that it could help adjust supply and demand in the real estate market to some extent, as fewer people buy homes while the financing is at its most expensive.

“The rate may be higher but the price [buyers] can negotiate could be better because there will be more supply of homes eventually,” Satterlee said.

One factor that could keep first-time buyers in the home market is that rents are also shooting upward.

“All my clients that are renting right now, their rent increases are so high, it’s still cheaper to have a mortgage payment,” Diodato said.

People who already own a home and are looking for a new one are in a more comfortable position than initial buyers.

“It’s not really going to make much of a difference,” Shah said. “It’s kind of putting things off for some folks for a few months.”

But the higher interest rates could throw cold water on buying second homes as investments.

“It makes it a lot harder to find rental properties that you can be generating income from,” Kopelman said.