Higher mortgage rates add to homeowners’ debt load

In a recent report, the Consumer Financial Protection Bureau (CFPB) showed that the sharp rise in mortgage rates in 2022 is already having a significant impact on homeowners, with borrowers in certain demographics reaching new debt loads Level. Increased monthly payments can make it difficult for mortgage borrowers not only to meet their financial obligations, but also to qualify for additional financing if needed.

key points

  • The CFPB released data for the first half of 2022 for the country’s largest banks.
  • Mortgage payments have risen sharply as home prices have risen at an alarming rate over the past two years and interest rates hit their highest level in two years this year.
  • The federal agency highlighted that black, Hispanic white and Asian homeowners were disproportionately affected compared with non-Hispanic white borrowers.

Mortgage payments have reached new heights

The average monthly mortgage payment excluding property taxes and insurance reached $1,974 in June, up 36.5% from the December 2021 average of $1,446.

While home prices have risen sharply over the past two years, the CFPB noted that the average loan amount increased just 1.1% during the six-month period, while the average interest rate jumped from 3.30% to 5.26%.

Increases in monthly mortgage payments affect homeowners across all demographics, but the burden hits some groups more than others, especially when it comes to debt-to-income ratios.

The debt-to-income ratio (DTI) assesses how much of a borrower’s gross monthly income goes toward paying off debt. In June, the average DTI for Hispanic white borrowers was over 40%, while that increased to 39.4% for Black borrowers. DTI also rose for Asian and non-Hispanic white borrowers, but ended up below 39% and 37%, respectively.

Mortgage denials on the grounds of DTI also reported an increase across the board, but were more prevalent among black and Hispanic white borrowers. Both communities had rejection rates of more than 45% by the end of the second quarter of 2022, compared with approximately 41% for Asian borrowers and approximately 35% for non-Hispanic white borrowers.

CFPB expects DTI to continue rising

While third-quarter data is yet to be released, the CFPB expects DTI to continue to rise through the remainder of the year due to higher mortgage rates and first-half trends.

At the same time, the real estate market has slowed significantly as home prices have gotten lower and lower.

The coronavirus pandemic sent shockwaves through the U.S. real estate market as demand for more space increased, coupled with a housing shortage, and prices soared. According to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, home prices will grow at a staggering 18.8% in 2021. In September 2022, the index rose by 10.65% year-on-year.

With the unprecedented surge in home prices across the country, inflation has followed suit, reaching a 40-year high in June 2022, driven by a combination of increased demand, supply chain issues, a strong labor market and other factors.

Housing market conditions, along with high inflation and high 10-year Treasury yields, are causing mortgage rates to more than double in 2022. According to Freddie Mac, the average interest rate on a 30-year fixed mortgage started at an annual rate of 3.22%. By the end of October, it was above 7% for the first time in 20 years, before falling again to 6.49% in early December.

If you’re considering buying a home in 2023, keep track of mortgage rate trends and be sure to consider the potential impact of higher monthly payments on your budget and your credit opportunities.

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