It's too early to tell if the Federal Reserve's decision to raise interest rates has benefited the American economy. However, the impact that higher interest rates have on mortgage payments is clear. According to Zillow, the average mortgage payment in the U.S. has increased by 96% over the past four years. This significant increase will undoubtedly put a significant financial strain on many homeowners.
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Zillow also points out another worrying trend: Homebuyers in major U.S. metropolitan areas now need an average down payment of $127,000 to purchase a home and comfortably manage the mortgage. It's important to note that this figure is for regular homes, not luxury homes in places like Pacific Palisades or the Hamptons.
That's a lot of liquid cash even the relatively wealthy can muster, especially for those making the median U.S. household income of $74,000 a year (according to the U.S. Census). It's also why a Zillow survey reported that 43% of homebuyers in 2023 will have to rely on financial help from family or friends to fund a down payment.
These high down payments are a direct result of today's interest rates. Lenders consider a borrower to be “well-affordable” on a mortgage if the monthly payment is equal to (or less than) one-third of the borrower's average monthly salary. According to data from Zillow, the average monthly payment is $2,200, which is theoretically within the reach of a buyer making $77,000 a year.
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But with current interest rates, a six-figure down payment may be the only way a borrower can afford it. Currently, the average down payment of $127,000 is roughly one-third of the median U.S. home price and nearly double the median U.S. household income, and the housing market is showing signs of slowing. Nevertheless, it's worth noting that interest rates aren't the only factor driving up mortgage payments.
It is important to remember that a “mortgage payment” includes several components, including loan principal, loan interest, property taxes, and insurance. This total is the amount a borrower must pay each month to meet their mortgage obligations. Home insurance rates have risen in many states, leading to higher mortgage payments, especially in areas with a higher risk of natural disasters, such as the Gulf and Pacific coasts.
Homeowners in America's two most populous states, Florida and California, are struggling with rising insurance premiums as insurers pull out of their states or protect themselves against future claims. This makes sense in theory, but adding $400 a month to your mortgage payment because of rising premiums compounds the financial burden caused by mortgage interest accrued over the past four years.
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