Higher Mortgage Rates Increasing Homeowner Debt Burden

In particular, white Hispanic and Black borrowers have reached new debt levels.

A Black couple standing outdoors on a sunny day on a residential street, with a young man holding a folder.

In a recent report, the Consumer Financial Protection Bureau (CFPB) shows that the meteoric rise in mortgage interest rates in 2022 has already had a significant impact on homeowners, with borrowers in certain demographics reaching new debt burden levels. Higher monthly payments can make it more difficult for mortgage borrowers to not only keep up with their financial obligations but also to qualify for additional financing when they need it.

Key Takeaways

  • The CFPB has released data for the first half of 2022 from the country's largest lenders.
  • With home prices increasing at a staggering rate the past two years and interest rates reaching a two-decade high this year, mortgage payments have risen drastically.
  • The federal agency highlights that Black, Hispanic white, and Asian homeowners have been impacted more heavily compared to non-Hispanic white borrowers.

Mortgage Payments Have Reached New Heights

In June, the average monthly mortgage payment—excluding property taxes and insurance—reached $1,974, a 36.5% increase from an average of $1,446 in December 2021.

While home prices have risen dramatically over the past two years, the CFPB notes that the average loan amount increased by just 1.1% during that six-month period, while the average interest rate jumped from 3.30% to 5.26%.

This increase in monthly mortgage payments has impacted homeowners across all demographics, but the burden has affected certain segments more than others, particularly when it comes to debt-to-income ratios.

The debt-to-income ratio (DTI) assesses how much of a borrower's gross monthly income goes toward debt payments. In June, the average DTI for Hispanic white borrowers surpassed 40%, while Black borrowers saw an increase to 39.4%. DTIs also rose for Asian and non-Hispanic white borrowers, but the end result is less than 39% and 37%, respectively.

Mortgage denials with DTI reported as a reason also increased across the board but again were more prevalent among Black and Hispanic white borrowers. The denial rate for both communities exceeded 45% by the end of the second quarter of 2022, compared to about 41% for Asian borrowers and roughly 35% for non-Hispanic white borrowers.

The CFPB Expects DTIs to Continue to Rise

While third-quarter data is not yet available, the CFPB expects DTIs to continue to go up through the rest of the year due to rising mortgage rates and first-half trends.

At the same time, the housing market has slowed down significantly as homes have become less affordable.

The coronavirus pandemic sent shock waves through the housing market in the U.S. As demand for more space increased, coupled with a shortage of housing, home prices skyrocketed, increasing at an eye-watering rate of 18.8% in 2021, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. In September 2022, the index showed a year-over-year increase of 10.65%.

As home prices saw unprecedented spikes around the country, the inflation rate followed suit, reaching a 40-year high in June 2022, caused by a mixture of increased demand, supply chain issues, a strong labor market, and other factors.

Housing market conditions, along with a high inflation rate and high 10-year Treasury note yields, have all contributed to mortgage rates more than doubling in 2022. According to Freddie Mac, the average interest rate for a 30-year fixed mortgage loan began the year at 3.22%. By late October, it surpassed 7% for the first time in 20 years before beginning to fall again to 6.49% in early December.

If you're considering a home purchase in 2023, keep track of mortgage rate trends and be sure to take into account the potential impact of a higher monthly payment on your budget and credit opportunities.

Article Sources
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  1. Consumer Financial Protection Bureau. "Office of Research blog: Higher interest rates leading to higher debt burdens for mortgage borrowers."

  2. Bloomberg. "How the 'Rise of the Rest' Became the 'Rise of the Rents'."

  3. S&P Dow Jones Indices. "S&P CoreLogic Case-Shiller Index Reports 18.8% Annual Home Price Gain for Calendar 2021."

  4. CNBC. "Why is inflation so high? An economist explains why everyday essentials cost more."

  5. Freddie Mac. "Mortgage Rates."