Interest rates higher for longer, what does this mean for homebuyers?

With mortgage rates widely predicted to remain higher for longer, where does this leave first time homebuyers? Are there any affordable options for them?

Mortgage rate predictions

It's been a couple of weeks since the Federal Open Market Committee (FOMC) confirmed a unanimous vote to leave the benchmark federal funds rate unchanged. This has meant that the hope of mortgage rates dropping in the near future has been quashed and now the various analyst forecasts show mortgage rates remaining higher for longer.

At the start of the year, it was widely predicted that rate cuts were coming, maybe even six or seven of them during 2024, but with inflation remaining high, the FOMC will likely need to hold off on rate cuts for the foreseeable future.

For those hoping to start their homeownership journey this Spring/Summer, this has been a bit of a blow in an already tough market, as the cost of borrowing remains out of reach for many. The average mortgage rate, hovering at the elevated levels of between 6.5% and 8%, results in painful mortgage monthly payment amounts. It would be difficult to imagine fixing for 30 years when mortgage rates remain at a two decade high.

Solutions for first-time homebuyers

First-time homebuyers never did have it easy, what with the need to raise a significant down payment, have a stable income in a world where layoffs have become more frequent, and now needing to have even more disposable income available to cover high mortgage monthly payments.

Thankfully, there are alternatives out there. Ownify not only helps first-time homebuyers overcome the barrier of savings for a significant downpayment, requiring just 2% down, it also has proven to save its customers significant sums each month - Ownis have saved on average $291 per month compared to the equivalent mortgage payment.

Over two years, this monthly payment difference would equate to just under $7,000 saved, well $6,984 to be exact! I’m sure first-time homebuyers could think of plenty of other worthwhile uses for those funds.

Equity and wealth building

There’s also another reason to take a closer look at Ownify. Not only do Ownis save each month compared to the equivalent mortgage monthly payment, they also gain more equity ownership.  When buying a home using a mortgage, buyers need to be aware that due to the amortization schedule, interest payments are front-loaded. This means that the vast majority of each monthly repayment is paying the lender interest, with only a nominal amount in the first years repaying the principal.

The early mortgage years and understanding principal vs interest repayment 

The first five years of a mortgage represent a critical juncture in the homeownership journey. During this time, borrowers navigate through the early stages of their loan term, establishing a foundation for their long-term financial obligations. Understanding the breakdown of payments during this period is essential for homeowners to grasp the nuances of their mortgage commitment fully.

Let’s take a look at the following scenario.

• A home is purchased for $400,000
• Firstly, with a mortgage option, a first time homebuyer is likely to need to put down a 10% down payment. Assuming therefore a $40,000 down payment, then a mortgage total of $360,000 is required.
• Using the average home purchase 30 yr mortgage rate (as at May 14 from bankrate.com) at 7.21%, then the first time homebuyer’s monthly mortgage principal & interest payment would be $2,466 (not accounting for any property taxes or home insurance, which are likely to on top each month- let’s estimate an extra $800 needed each month for taxes, insurance and repairs).
• During the first 5 years of the mortgage, most of that payment covers interest, and very little repays the principal. In this scenario, just $283 per month repays principal in year 1 and $304 in year 2.
• Over the first five years just $20,783 equity or principal would have been repaid. 
• It would only be in the year 2045 that the principal repayment first becomes higher than the interest payment.

It’s worth having a play with amortization calculators (Zillow has a decent, easy to use one) to get a feel for how this looks at different house purchase prices and mortgage rate scenarios.

Example costs and savings with Ownify

Ok, now let’s take the same scenario with Ownify. Ownify works differently to a mortgage as there is no debt to be repaid. Rather, an Owni purchases equity each month whilst paying rent on the portion of the property they do not yet own.

• The same home is purchased for $400,000
• Ownify only requires 2% down, so $8,000 is required upfront from the first-time homebuyer - an immediate ‘saving’ of $32,000.
• The Ownify monthly payment would be $3,313. This includes property taxes, insurance and repairs.
• Within this monthly payment, there would be a monthly equity buy of $541 during the first year.
• During the first 5 years of the Ownify program, $42,575 in equity would have been purchased. The program is designed so that Ownis own 10% equity at the end of year 5.

So that’s 10% equity with Ownify versus just $20,783 principal repaid with a mortgage. I know which one I’d prefer!

To find out more about Ownify and play with our calculators, visit https://ownify.com/homebuyers

If you're a first time homebuyer then you can see if you pre-qualify here