Homebuyers hit with record jump in mortgage rates

The average 30-year fixed mortgage rate hit 5.78% Thursday, the largest one-week increase in the measure since 1987, marking the latest blow to housing affordability for Long Islanders.

The average rate reached its highest level since 2008, according to mortgage giant Freddie Mac, which polls lenders to produce the weekly survey.

The Federal Reserve raised its benchmark rate by three-quarters of a percentage point Wednesday in an attempt to slow the growth of consumer prices. The Fed rate hike, while not directly tied to mortgage rates, can increase the cost of borrowing for consumers and businesses. It was the largest such increase since 1994. Lenders typically respond to Freddie Mac’s survey Monday through Wednesday, so a portion of the responses do not reflect the Fed’s announcement.

It’s important for borrowers to understand that the Fed doesn’t set mortgage rates, and its actions this week didn’t dictate the uptick, said Quentin Hardy, market leader at Movement Mortgage, a direct lender, in Huntington. In fact, the Fed’s ability to control inflation will be critical for a stabilization in rates, he said. Last month, U.S. consumer prices rose 8.6% compared with May 2021, and prices in the 25-county region that includes Long Island increased 6.3% during that time.

“As long as inflation continues unabated or gets worse, then we can certainly expect rates to go with that for some time,” Hardy said.

There’s also no single mortgage rate, and factors such as the size of the loan, a borrower’s down payment and creditworthiness can affect rates, he said. Despite the rate increase, Hardy believes potential borrowers should factor in the long-term effects owning a home can have on their net worth when deciding whether to wait on a home purchase.

“I always ask them, ‘What are you waiting for? What do you expect to happen?’" he said. “Since all indicators are that home values are going to continue to increase, you’re going to wait six months or a year to buy the house you’re looking at now at a higher price.”

Hardy is skeptical home prices will budge, given the Island’s near-record low number of homes for sale. That shortage has Long Island homebuyers facing both rising home prices and higher borrowing costs.

These examples, created using the mortgage calculator at Bankrate.com, illustrate the impact those two factors have had on monthly payments on a median-priced home in the past 12 months:

A buyer purchasing a home for the median sale price of $635,000 in Nassau County in May 2021, with a down payment of 20% and a mortgage rate of 2.96% — the average 30-year fixed home loan rate at the time — would have paid $2,130 a month in principal and interest.

If the same buyer applied that same down payment, $127,000, to purchase a home at the median price in Nassau this May, $686,000, at that month's average mortgage rate of 5.23%, the monthly payment would have ballooned to $3,079, an increase of $949. Taxes and insurance, which vary by home and community, aren’t included in the calculations.

In Suffolk County, a buyer purchasing a home at the median sale price last month of $555,000 would pay $833 more a month for principal and interest, if they used the same down payment they had a year ago, when the median price was $499,000 and mortgage rates were more than two percentage points lower.

“Higher interest rates lower [buyers’] purchasing power since a larger portion of their monthly payment will be put toward interest,” wrote Nadia Evangelou, senior economist and director of forecasting at the National Association of Realtors, in commentary published Thursday. “This means that buyers can afford fewer houses than they could at the beginning of the year.”

Buyers searching for homes have been checking in to see whether changes in rates have affected the amount they qualify to borrow, said Zahra Jafri, president and founder of Lynx Mortgage Bank in Westbury.

“For some, the increase is OK and they can continue to search,” Jafri said. "For some borrowers, they have to sort of alter their search, amend price points or look to perhaps put additional down payment.”

Jafri said the more than 2.5-percentage point rise in rates this year is the fastest she has seen in her 30-year career in the mortgage industry. For Long Islanders who can afford a home purchase, she believes higher mortgage rates will slow recent record-breaking increases in home prices, with fewer sellers receiving more than their asking price.

“This homebuyer frenzy we were experiencing will level,” Jafri said. “It’s not going to be so much of a seller’s market. It will shift a little more [to the] buyer.”

She said she expects mortgage rates will move into the “high sixes” by the end of the year.

Mortgage rates had been historically low. The average 30-year fixed rate since 1971 was about 7.8% through April 2022.

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.