The yield on the 10-year Treasury hit 3.01 percent today. Mortgage rates could see continued upward pressure if the economy were to strengthen. Rising interest rates diminish home affordability. According to a recent report, if interest rates were to rise to their historical norm of 7 percent, only a third of U.S. homes would be affordable. Freddie Mac considers a mortgage affordable when it costs a homeowner 28 percent or less of their monthly gross income. As with most affordability calculations, this Freddie Mac index makes some pretty optimistic assumptions to make affordability look better than it is. If you can find a house in Houston TX where the taxes and insurance are only 2.18 percent of the value of the property, please let me know. LOL!
This affordability calculator from Freddie Mac can help prospective home buyers see how interest rate increases will affect monthly payments, but beyond that the affordability calculations are only generalizations.
Updated: To see what I mean about generalizations and assumptions, visit my page on Houston area housing affordability and see how “affordability” can be very misleading.