The new math of borrowing

Last year you could get a home mortgage for around 3¼%, which made borrowing to buy a home relatively inexpensive by historical standards. Same for car loans which until recently, could be had for 1.9%. No more. Gone are the days of cheap borrowing. As of 6/27/22 the average 30-year fixed mortgage rate was 5.98%--almost double the rate from last year.

Does that mean that a mortgage payment is twice as much—not really. Just to give you an idea of what that increase in mortgage rates means, I’ve put together an example.

How much more?

Let’s say that you are buying a home for $1 million, an unfortunately easy threshold that is commonly exceeded in the Greater Boston area. For a conventional mortgage, you’ll need to have at least 20% for a down payment or $200,000.1 That means you’ll need to borrow $800,000.

Last year your payment on this loan would have been about $3,482 per month. As of 6/27/22 your payment would be $4,786 per month.2 That’s an increase of $1,304 per month or an additional $15,650 per year.

Higher rates are already having a slowing effect on the mortgage and housing markets. And its effects are going to ripple through the economy for years.

What does this mean for borrowers?

We have several observations. With housing we think that prices will stop rising and possibly fall in some markets. Homebuyers will also be forced to rent or live with family members for much longer than before. This may allow them to save up enough for a large down payment that keeps their monthly mortgage payment low or at least within their budget.

With car buyers, there is the additional factor of high gas prices. Already consumer demand for electric vehicles is increasing as many see it as a way to eliminate paying high prices for gasoline. However, the supply of some EVs is constrained by the shortage of batteries and electronics components. Just this week some EV makers have raised their prices. High gas prices will also cause consumers to seek out other ways to cut gas consumption (it was reported this week that consumption has declined). They could find other ways to get around or advocate for a continuation of working remotely to eliminate commuting costs.

Big changes

These are just some of the big changes that are underway. We believe that these changes will have significant impacts on the US economy and stocks. As such, investors may need to rethink their strategies, especially if they were focused on high-growth companies with unproven or early-stage products.

We believe the silver lining to this environment is that higher interest rates will, in the long run, help to return some markets such as housing to more normal levels. While the transition will likely be painful, it has taken some risk out of the picture which is important for the long term sustainability of the US economy.

We’ll have to see what the second half of 2022 brings, but the landscape is changed and what worked before may require a new approach in the higher interest rate environment.

Do you have questions about how to navigate higher borrowing costs? Give us call. We’re here to help. You can schedule a quick call with me by clicking HERE.

Lyman H. Jackson

Lyman@PlanWithFPS.com

617-653-3303

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