They Signed Contracts for Their Dream Homes Last Year. Now Their Borrowing Costs Are Ballooning.

People who’ve agreed to buy a home under construction but haven’t closed are facing mortgage interest rates that can be nearly double what they anticipated when paying the down payment.

New homebuyers are facing a variety of obstacles this year, from soaring mortgage rates to home construction taking longer than usual due to supply chain and labor constraints.

Many homebuyers who signed on to buy a new home in 2021 or earlier this year have been calculating monthly payments based on near-record low mortgage rates, around 3% or less. But average mortgage rates rose this spring to 5.3%, according to Freddie Mac,

when the Federal Reserve started raising short-term interest rates.

The difference can translate into hundreds of dollars per month in mortgage payments — leaving buyers with the choice of swallowing the additional costs or forgoing the deal and potentially sacrificing the down payment.

Borrowers have, so far, been mostly willing to accept the extra costs to keep their purchases afloat, mortgage brokers and homebuilders said.

However, the combination of new construction prices and higher mortgage rates will likely reduce funding for new homes in the coming months.

Buyers of existing homes are much less exposed to interest rate risk as they typically close within a month or two of signing a contract. Homebuyers worried about sudden exchange rate fluctuations can lock in interest rates, often for a period of 30 or 60 days.

New homebuyers, who make up more than 10% of home purchases in the US, often sign contracts and pay a deposit months before their home is ready.

Supply chain issues have slowed construction times and delayed many home closures by weeks or months.

With the average 30-year mortgage rate rising to 5%, home ownership may now be out of reach for millions of Americans. WSJ’s Dion Rabouin explains the impact on potential buyers, sellers and the housing market. Illustrated by: Adele Morgan

“It just presents a lot of uncertainty and volatility in consumer decisions,” said Rick Palacios Jr., research director at John Burns Real Estate Consulting LLC. “Opportunity of [the buyer] no longer qualify for this house to go up significantly. ”

Builders can resell homes that are no longer under contract to other buyers on their waiting list, Mr. Palacios said. But in an April survey by his company, some builders reported that waiting lists for potential buyers were shrinking as interest rates rose.

When Lauren Sparks and Taylor Briggs paid a down payment on a new yard home in Savage, Minn., last summer, their estimated loan had an interest rate of 2.875%. In January, they had the option to lock in a rate of 3.75% for 75 days, but they decided to decline this in the event that construction was delayed beyond the 75-day deadline, Mr. Briggs said.

“I didn’t know rates would explode that much,” he said.

In February, the pair opted to lock in the 45-day interest rate at 4.375% and pay more upfront to lower the rate to 3.625%, Mr. Briggs said. The sale ended in March.

Most buyers are stretching their budgets rather than giving up on buying a home, unless they can’t qualify for a mortgage at current rates, mortgage brokers and real estate agents say. .

Many people who agreed to buy a home months ago don’t want to back out of the deal and start shopping again. The number of homes available for sale is near a record low, and home prices continue to rise sharply each month.

Stephanie Dodoo and Micah Barber, with their daughter Lyric. When their home construction stalled and interest rates began to climb, they considered walking away.


Photo:

Jeff Clarke

Last year, Micah Barber and Stephanie Dodoo decided to replace their Austin, Texas home with a larger one on the same property. They paid a deposit to a builder in September and October and expected construction to begin in January. Mr. Barber said: “It was delayed and interest rates started to climb. , they consider leaving.

“There’s a pretty big difference, when you’re taking out a six-figure loan, paying 3.5% and paying 5.5%,” he said. “I’ve been losing sleep a bit.”

They originally planned to get a fixed-rate mortgage but switched to an adjustable-rate mortgage with a fixed rate of 3.75% for the first 15 years after building the home.

In response to rising interest rates, builders are helping buyers lock in interest. Home Taylor Morrison Corp.

Chief Executive Officer Sheryl Palmer said on an April 27 earnings call that the homebuilder has probably seen more six, nine or 12 month rate lockouts in the past 10 days than in the past five years.

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Mortgage broker Chris Robson of Fresno, California, says many of his clients buying new homes are choosing a nine-month or 12-month interest rate lock, which can be obtained at a rate higher than current rates.

In some cases, pre-qualified buyers with lower interest rates, he said, need to pay down or refinance other debt, such as a car loan, to keep up. conditions at the current level.

On the plus side, some workers have gotten a raise since they were prequalified nine or 12 months ago, which helps offset the effect of higher interest rates, Mr.

Bob and Anna Bergen signed a home purchase contract with a home builder in February, after struggling to find a home in suburban Detroit. They expect their house to be completed in early 2023.

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Bob and Anna Bergen are budgeting for a 5.5% mortgage rate.


Photo:

Rachel Wallace

“It’s exciting, but it’s also nerve-wracking,” says Bergen. They haven’t shopped a mortgage yet, but he’s budgeting to pay 5.5% interest. The couple are also planning to list their current home next year when the new home is ready.

“Financial uncertainty is probably the highest point in any recent history, given how quickly rates or the housing market can change,” he said.

Write letter for Nicole Friedman at nicole.friedman@wsj.com

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