The Difference Between a 3% and 7% Mortgage Rate: $1,000 Per Month


As the Federal Reserve continues to fight inflation, mortgage rates increased rapidly in 2022, starting the year at 3% and rising above 7% before dropping back to roughly 6.5% at the end of the year. How do rapidly rising mortgage rates affect housing affordability?

The difference between a slightly more than 3% mortgage rate and a 7% mortgage rate adds roughly an additional $1,000 mortgage payment to a typical, new median-priced single-family home and prices 18 million U.S. households out of the market for the home.

This means that a mortgage payment on a $450,700 home would have increased from $1,925 in January 2022 to $2,923 in late October when mortgage rates topped 7%.

And while mortgage rates fell back modestly to a level of 6.42% at the end of the year, the monthly mortgage payment on the same home increased from $1,925 in January when rates were just above 3%, to $2,740 in December when rates doubled, adding more than $800 to the cost of the home loan.

Higher mortgage rates have clearly worsened housing affordability as home prices remained high in 2022. As the charts below show, each 100-basis-point rise in mortgage rates requires roughly an additional $10,000 in household income to qualify for a similarly sized mortgage loan, and prices approximately five million additional households out of the market for a home at the same or similar price level.

Priced Out Graphs

NAHB economist Na Zhao provides more analysis in this Eye on Housing blog post.

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