The highest inflation in four decades has pushed interest rates up to newsworthy levels; on January 1, 2022, the 30-year fixed rate mortgage was 3.11%. Now, as I’m writing this in the beginning of November, the rate is around 7.06%, a remarkably fast escalation in under a year.
This feels like a jolt to homebuyers entering the market, even when considering the all-time high rate of 18.63% in October 1981, or even the average rate in the 1990s of 8.12%. To illustrate the impact of rising interest rates on homeowners’ ability to qualify for a mortgage or refinance, we talked to Jason Gordon, a Certified Divorce Lending Professional (CDLP™).
Mr. Gordon suggested we consider the following distinctions using the above-referenced numbers. For conversation purposes, imagine the Borrower was qualified for a new loan with a principal + interest payment of $3,000.
Assuming a 30-year amortization, the maximum corresponding loan amounts at these interest rates are as follows:
3.11% interest rate = loan amount of $701,656
7.06% interest rate = loan amount of $448,205
Rising interest rates are one thing — the decade-long home price appreciation is another. The combination is a double whammy that impacts the ability of a divorcing party to buy out their ex to keep the marital home. I’ll explain a little more about why this is so, and then offer a few considerations you can share with clients who are at these crossroads.
Housing Affordability Is Plunging
Mortgage rates determine how much of a house a buyer can afford. With new mortgage rates at around 7%, that means a heftier mortgage payment. As the Washington Post reported in the beginning of October,
“The math on a 30-year, fixed-rate loan for a $600,000 house with a 10 percent down payment tells the tale: At a 4% interest rate, the monthly payment would be $2,500. At 7% percent, the payment is $1,100 higher, at $3,600.” That’s a 45% increase in mortgage payment!
What’s more, home prices, in general, are still rising, albeit at a slower pace than we’ve seen since the pandemic hit. We are now in our 126th month of year-over-year gain in price appreciation — that’s over a decade. (Note that this is a national statistic; your local market will vary.) The rate at which home values are rising is starting to slow to a healthier level, but still, this record-breaking decade has a very direct and inescapable impact on affordability.
It’s More Difficult to Qualify for a Loan
Because higher interest rates mean higher mortgage payments, the income required to qualify for a new home loan (or a refinance) must meet the threshold of risk. There are lender restrictions on how high payments can be relative to one’s income. And if a buyer’s income isn’t rising along with interest rates and home prices, then in order for those buyers to afford the same home they could earlier in the year, home prices would need to be reduced by 33.6%.
(Spoiler alert: Salary.com reports wages have increased just 4% since January — compared to mortgage payment increases of 45%.)
What All This Means for Divorcing Homeowners
These market trends are not good news for divorcing homeowners who may wish to buy out their ex through refinancing the existing mortgage. Going from a two-income household to a single-income household is difficult enough without the added layer of rising interest rates and property values.
What Family Law Attorneys Need to Know
While current market conditions may make the real estate aspect of your clients’ cases more challenging to navigate, these suggestions may help you and your clients when you’re developing a strategy to handle the house:
- Update the home’s value and the home’s equity. If the current valuation is more than 30 days old, a new market valuation or appraisal is needed to assess either the listing price or the ability to refinance.
- Rethink buyouts. Any client who has a mortgage preapproval based on an old rate that hasn’t been locked in should get an updated approval to determine if a buyout is still viable. A CDLP has the knowledge and skills to help divorcing homeowners with a strategy.
- Consider tax implications. Because of the steep rise in equity around the country, the consequences of capital gains are bigger than they have been in years. Having your clients consult with a tax professional could save them a ton of money.
- Protect credit. Whether wanting to qualify for a refinance for an equity buyout, or wanting to qualify for a new mortgage post-divorce, it’s imperative that your clients protect their credit. Easier said than done when going through a divorce and setting up a single-income household, I know. Reviewing their credit report for mistakes, avoiding large purchases, refraining from opening new lines of credit — all these can go a long way toward protecting your clients’ financial present and future.
- Work with a CDRE™. Certified Divorce Real Estate Experts have the knowledge to understand these markets, the tools to pivot on a dime, and the skills to handle clients who simply aren’t realistic about today’s reality. When we are talking about assets in the hundreds of thousands — or even millions — of dollars, the wrong Realtor can cost a fortune that a family doesn’t have to lose.
The truth may be that, for most, inescapable damage will be done to credit and wages throughout the divorce process. So, clients should mitigate the damage as best they can while knowing that they are only in control of so much. Entering the housing market without equity rolled over from a former house is tougher than it probably ever has been. So if they sell, they should guard their cash carefully and lock as much of it away as possible so they can use it eventually to plant roots in another home.
Lastly, they should plan to take at least two years to rebuild. Their scaled-back lifestyle will be temporary, but with careful planning, resolve, and hard work, they can find their home again.
Please reach out to be time to help with any of your real property matters.
Katina Farrell – CDRE – Certified Divorce Real Estate Expert