Homeownership became more affordable this week, as 30-year fixed mortgage rates dropped below 7% for the first time since August.
After a peak of nearly 8% in late October, the average 30-year mortgage rate has been sliding every week since. As of Thursday, the rate is 6.95%, according to Freddie Mac data.
With inflation easingmortgage rates have fallen amid expectations that the Federal Reserve will make interest rate cuts in 2024. Most major lenders and realtor organizations expect 30-year rates to land somewhere between 6% and 7% in 2024.
For potential buyers previously priced out of the real estate market, the reduced mortgage rate could give them the financial cushion they need to buy a home.
Based on the new average rate of 6.95%, the monthly costs for a 30-year fixed rate mortgage worth $300,000 would be $1,986. Compared with October’s peak rate of 7.79%, that works out to $172 in monthly savings. For a mortgage worth $400,000, the savings would be $229 per month.
Whether the reduced mortgage rate will offer enough breathing room for buyers will depend on their income, savings and the purchase price of a home.
Unfortunately for buyers, home prices have continued to rise in 2023, which might offset the interest rate savings in many markets. The median existing home price is $413,500, a year-over-year increase of 3.4%, according to online realtor Redfin’s latest data.
A common rule of thumb, known as the 28/36 rulesays that a home is affordable when your housing expenses — mortgage payments, taxes and insurance payments — don’t exceed 28% of your gross monthly income. Your total debt including your mortgage, other loans and credit cards, shouldn’t be more than 36% of your gross monthly income as well.
If you’re thinking about buying a home, use CNBC Make It’s mortgage calculator to figure out how much your monthly mortgage payments would be based on the prevailing 30-year interest rate.
Note that the calculator doesn’t include additional expenses such as insurance, property taxes and private mortgage insurance, which is typically required for mortgages with less than a 20% down payment.