Will Current Housing Interest Rates Affect Millennials?


There has been a lot of focus recently on the housing market, which has been complicated by rising interest rates, making it difficult for first-time buyers to break into the real estate market. High-interest rates are millennials’ number one barrier to homeownership. What is a mortgage interest rate? A mortgage rate is the interest rate charged for a home loan. Mortgage rates can either be fixed at a specific rate, or variable, fluctuating with the economy.  The mortgage rate that a home buyer is offered is determined by their lender and depends on the individual's credit history and financial circumstances, along with the current economic trend.

The interest is paid monthly, along with your principal payment, until your loan is paid off. Your mortgage interest rate is what it costs you each month to finance your property. Therefore, when a mortgage interest rate is abnormally high, it makes affording a home much more difficult, especially for a young homebuyer. Not only do millennial homebuyers need to save more for rising housing interest rates, but they also must save for a downpayment.

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Navicore Solutions and Affinity Federal Credit Union are working towards the shared goal of enabling individuals to achieve financial wellness through education and access to resources. In this episode of Millennial Debt Domination, Katie Fatta is joined by Grant Gallagher, a millennial himself and head of financial well-being and brand communications at Affinity FCU. Grant is also the co-host of Affinity FCU's podcast, Wellbeing and Your Wallet, available on all the major podcasting platforms.

How much downpayment do I need?

Before jumping into the current interest rates, it’s important to establish what a downpayment is and how it affects your house hunting. A downpayment is the initial cash payment the buyer makes during a real estate transaction. The downpayment represents a percentage of the total purchase price of the home, not the full costs. The percentage will vary, but usually, you’ll want to shoot for a 20% downpayment. By putting down a 20% downpayment, you can avoid private mortgage insurance, or PMI.

PMI is an additional surcharge on top of your regular interest, insurance, and mortgage payments. This surcharge is to ensure the lender will receive their payment. This is a double-edge sword because it allows borrowers who put less than 20% down to get a new home, but it does add to your monthly payment. This amount could be from 10-20% depending on how qualified you are as a borrower.  

A mortgage is a very expensive proposition in the first place, adding PMI on top of that could make it even more so. Realistically, if buying a home is important to you and you can’t put down that 20%, there are ways you can put down as low as 3% in some instances. Then, you can have that PMI removed once you have attained 20% equity in your home.

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Is there a disparity between income increases and the rise in housing prices?

Over the past few years, there has been some nice income growth, which doesn’t occur all too frequently. However, we’ve also seen a rise in the housing market. The rise in housing prices have outpaced income growth, which is a challenge for anyone who is early in their career or not yet established in their career.

Real estate is highly location-dependent, and affordability is subjective. Housing prices are up across the board no matter your location. People can struggle to figure out what they really can afford, don’t get enough information before they dive in headfirst, and may end up house poor. House poor describes anyone, at any income level, who struggles to pay a mortgage on their home. People tend to become house poor when they have a high mortgage payment compared to their income. Homeowners who are house poor may find themselves paying for their home and living expenses while struggling to save or have money for non-essentials.

Read More: Mortgage Basics: Understanding the Terminology of Buying a Home

What is the current average mortgage interest rate?

The average mortgage interest rate is always changing. However, if you look at it from a current average perspective, it’s currently 6.5-7% right now. That number seems high, but that’s come down a bit. In October 2023, those rates peaked at 8%, but since then the interest rate has come down a bit. Believe it or not, rates right now are about where they were a year ago, but back then they were trending up and now they are trending down. Hopefully, it continues in that direction and results in better inventory.

Is it possible for millennials to become homeowners in the current environment?

With interest rates and property values on the rise, it almost feels impossible for millennials to purchase a home of their own. Nevertheless, there are some moves millennials can make to aid them in purchasing a home. Purchasing a fixer-upper could be a way for millennials to become homeowners. If you can find a fixer-upper and you are a patient person who can live through renovations, this is a great way to have a significant return on your investment and have a place to live, particularly if you have some DIY skills.

Read More: Homeownership and Millennials, Pre and Post Pandemic Impact

Next, manage your expectations when house hunting. Do you need a house with three or four bedrooms and a big yard? Identify essentials you need for your home and try to limit any additional spending because it only will increase your long-term costs. Think about what amenities are critical pieces in the home you’re looking for. By doing this, you can find something that is a little bit more affordable. It’s a tough time for now, but think of it as a timeline. Can it meet your needs for that time? Remember, you can always move, this is only your starter home. It’s bare and basic, but it’s what you need for now and then you can move when the environment gets better, and you truly need that space. In the meantime, you’ll continue to grow your wealth, income, and savings and you may be in a better position to buy a new home that has more amenities in the future.

What else is keeping millennials from becoming homeowners?

Other than high-interest rates, there are other factors keeping millennials from becoming homeowners. One factor is student loans. With student loan payments kicking back in, millennials are feeling the weight of their student loans now more than they have in the last few years. Debt in general is also a huge challenge for millennials looking to purchase a home.
Manage your credit card spending so debt doesn’t accumulate and become unmanageable.
In addition to credit card debt, vehicle loans have become more expensive in the last few years. The average auto loan three years ago was $200-$300, now they’re averaging $500. All these factors are adding up and having to make all of these payments, plus having to pay a mortgage, can be daunting for most millennials.

Read More: Are You Ready to Purchase a Home?

For millennial parents, childcare costs can play a huge role in delaying homeownership. Daycare tuition can cost more than some people’s mortgage. If you have little ones that need childcare, that can be one of your biggest bills. Many millennials are delaying having a family for this reason. If couples aren’t rushing to have a family, they might feel they don’t need as much space and are fine with their current situation. This means they’ll become homeowners at a later age, or they may never feel the need to purchase a home of their own.

Is there a ‘right’ time to purchase a home?

There’s no right time to purchase a home because it’s highly personal for everyone. Not everybody has ambitions of buying a home. Having an apartment and not being responsible for the upkeep is a huge draw for many people. Once you own a home, you are responsible for everything including appliances, maintenance, the exterior of your home, and even weather damage. However, if you’re a renter, those would not be something you have to stress about. There are a lot of financial aspects you must think about when buying a house that can come into play down the line. All of these reasons mean there is no right time to purchase a home, it’s all personal.

Read More: Mistakes First Time Homebuyers Make

If you’re currently feeling discouraged by the current interest rates and housing market, you’re justified in your feelings.  It’s a tough market and environment, but don’t lose hope. Rates are constantly changing, and nobody knows where the market will head. If you had your hopes of buying a home last year or this year, maybe re-manage your expectations and rework your timeline. The pricing and interest rates are already starting to move in a better direction for buyers, so it’s not all doom and gloom.

Katie Fatta bio with side border

Katherine Fatta is the Social Media and Content Specialist at Navicore Solutions. She creates fun and informative social media posts that engage the public. She’s also the host of Navicore’s podcast, ‘Millennial Debt Domination.’ You can listen to our podcast here.

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