The Fed recently announced another interest rate hike with plans to increase further in the coming weeks. With these increases, homebuyers have seen a decrease in their spending power up to as much as $200k according to Redfin. Rates went from the low 3% range up to the high 6% range in 2022 alone. For all borrowers, this has resulted in an increase in mortgage cost by at least 48%, and for POC, it has priced many families out of homeownership completely. So, what do all of these interest rate changes really mean for POC communities?
Interest Rate Trends and Homeownership for POC
The current macroeconomic conditions and policy trends have resulted in a boost in long-term interest rates during 2022. The interest rates for mortgages have also been affected. For black and POC homebuyers, this has resulted in an ever-increasing wealth gap directly tied to home ownership. The cost of buying a home has increased dramatically while the overall income levels of those in the POC community have plummeted. The increased interest rates paired with these issues translate to reduced home-buying affordability for Black and POC families.
What Do Higher Rates Mean for POC?
In a higher mortgage rate regime in the United States, it will take much longer to pay down or pay off the principal balance. For POC families or single homebuyers that have a 30-year fixed-rate mortgage, this means more money will be paid towards interest over the life of the loan. In reality, a 30-year fixed-rate mortgage will turn out to be much more expensive and take much longer to pay off than even ten years ago. To add insult to injury, there are significant studies that prove even in 2022, POC homebuyers are offered much higher interest rates than white households. This holds true even when their applications are comparable. This means that there is more interest paid over the life of the loan and the principal reduction is much slower. Interest rate hikes paired with racially biased lending practices lead to an increase in the wealth gap. It also leads to fewer POC home, and land owners, and more broken communities due to macroeconomic shock.
Upcoming Interest Rate Hikes 2022-2023
The Fed has also stated that interest rates are set to rise even further in the coming months to help reduce inflation. Credit card rates and mortgage rates will further increase which in turn means that becoming a homeowner will become more difficult. For current homeowners in the POC community, interest rate hikes can also spell disaster. Those who secured home loans with a fixed rate are in a good position, however, those who have an arm product are in for a rude awakening. What may have been an affordable mortgage payment at the outset will turn into an ever-increasing bill as time wears on. Not only does this increase the racial wealth gap, but it also destabilizes families and creates instability in the home.
Closing the Wealth Gap Through Homeownership
One of the most efficient methods of building generational wealth is through the ownership of land and real estate. Black homeownership has long been supported as being one of the best ways to help close the wealth gap between POC and white people. While this is true, it is imperative to rid the system of structural barriers that make homeownership difficult for POC. High-interest rates, unfair lending practices, and lowered income remain the biggest hurdles that POC face when it comes to purchasing a home and maintaining homeownership. Access to credit is directly tied to structural racism. The recent changes in the interest rates affect all Americans, but it has the biggest impact on people of color. The lack of inequitable access to credit for POC leads to lower credit scores overall. This, in turn, automatically regulates POC to the realm of higher interest rates when credit is extended. This makes buying a home more difficult for POC, and also makes it more expensive when a loan is secured to actually make a new home purchase.
The Breakdown of POC Homeownership Cost
According to a recent survey, the differences in the cost of homeownership between races can be broken down into four main categories. These are; property taxes, insurance premiums, interest rates during origination, and the rate of mortgage interest post-origination. In general, POC, especially Black and Spanish homeowners are met with higher interest rates in both the origination and post-origination phases. The current changes to the interest rates in the market will only cause this disparity to escalate further, thus making homeownership even harder to achieve. In addition to interest rates, POC is also charged higher rates for property taxes and for mortgage insurance than their white counterparts. This results in a loss of significant savings over their lifetime and a higher ownership burden which dramatically limits the ability to build generational wealth.
Why Are Interest Rates So Important For POC?
Interest rates affect spending and spending power for every consumer. They are much more important for POC than any other group due to the dramatic effect it has on lifestyle security. When it comes to buying a home or even refinancing an existing mortgage, firms look at several factors when extending an offer. Borrowers that have a higher perceived risk are offered higher interest rates. POC borrowers generally have lower credit scores and higher loan-to-value ratios than whites in the same category. This results in a 33% base point difference between POC borrowers and white borrowers for the same type of loan. To make it simple, this can lead to additional interest charges each year that range between $290 and $2,800.
POC borrowers that have already secured a home loan are often locked out of refinancing opportunities. When interest rates change either by going higher, or lower, they are disproportionately pigeonholed into maintaining their original agreement. On the other hand, white borrowers are more easily able to refinance their arm interest rates into lower fixed rates. They are even able to refinance their higher fixed rates into a more stable rate when the market is favorable. They are able to save on average $500-$900 more per year on mortgage interest charges than POC homeowners. Over the life of a mortgage, POC home buyers will pay an average of $20,000 more than their white counterparts, which is almost a loss of $70,000 in retirement savings.
Keeping an Eye on the American Dream
There is nothing more comforting that walking into your own home at the end of a hard day. However, for many POC and Black families, homeownership seems like a dream that will remain unfulfilled. With systematic racism, increasing interest rates, and predatory lending, buying a home can feel like running the gauntlet. The Narrative Matters to people from all walks of life and all age ranges. We work closely with content creators and publishers to seek out important ideas and topics that our readers find important.
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Image source:
https://www.gobankingrates.com/loans/mortgage/how-interest-rates-affect-the-housing-market/
https://www.gobankingrates.com/loans/mortgage/how-interest-rates-affect-the-housing-market/
https://www.forbes.com/advisor/mortgages/black-homeownership-gap/
