With mortgage interest rates rising substantially over the past two years, low- and moderate-income (LMI) borrowers—those who earn less than 80 percent of the area median income—have found it more difficult to buy a home. For homebuyers who have purchased a home with a mortgage, their payments have ballooned relative to what they would have been in a lower-interest-rate environment.

In response to rising interest rates and higher home prices, we find that the typical new homebuyer who attained their mortgage in 2022 is cost burdened, spending more than 30 percent of their monthly income on housing, and more than 70 percent of new LMI borrowers are cost burdened. Further, the typical new borrower of color is more likely than the typical new white borrower to be cost burdened.

Despite these burdens for new homeowners, higher interest rates reflect a strong economy and low unemployment, which have helped reduce serious delinquency rates to all-time lows. But if unemployment were to rise, cost-burdened homeowners with less housing equity are more likely to miss a mortgage payment. Black and Latine workers, who typically have lower incomes and historically experience higher unemployment rates compared with their white counterparts, face an even greater risk. Without action now to address the barriers to refinancing that LMI borrowers and borrowers of color face, many of these new homeowners could continue to face crushing cost burdens when interest rates inevitably decline.

New LMI homebuyers with mortgages have seen the largest cost burden increases

We used Home Mortgage Disclosure Act (HMDA) data to compare the experiences and characteristics of homebuyers between 2018 and 2022. To calculate the cost burden, for each loan, we started with the borrower’s monthly mortgage payment—using the loan amount, interest rate, and loan characteristics at closing—before adding 2.6 percent of the home’s value for real estate taxes, homeowners’ insurance, and utilities (the median estimate of homeowners from the 2021 American Housing Survey).

From 2018 to 2020, the median cost burden for homebuyers slightly decreased and median monthly payments remained around $1,770, as lower interest rates more than offset higher home prices. In 2021, rising home prices outweighed the stable interest rates, which led to higher housing cost burdens for new mortgaged homebuyers. In 2022, the housing cost burden increased again, courtesy of home price and interest rate increases, which has left the median borrower cost burdened.

How Cost Burdens Have Changed over the Past Five Years

In 2022, 44.7 percent of new purchase borrowers spent between 30 and 50 percent of their income on housing costs, with 59.2 percent of LMI borrowers doing so. Further, 5.8 percent of borrowers overall spend more than 50 percent of their income on housing costs, with that share doubling for LMI borrowers.

Interest rate and home price increases have meant that the share of new mortgaged homebuyers spending more than 30 percent of their income on housing jumped from 37 percent in 2018 to 51 percent in 2022. For lower-income households, that share increased from 58 percent to 71 percent.

If we look at it another way, the number of purchase mortgages stayed roughly the same in 2018 and 2022, but the number of households with a new mortgage spending less than 30 percent of their income on housing costs decreased 22 percent, while households spending between 30 and 50 percent increased 34 percent and those spending 50 percent or more increased 77 percent.

More than half of borrowers of color began their homeownership journey cost burdened

Cost burden increases have hit Black and Latine borrowers harder than white borrowers. In part, these disparities stem from Black and Latine families tending to have lower incomes, while Latine and Asian families tend to live in high-cost areas. Amid higher interest rates and elevated home prices, most new mortgaged Latine, Asian, Black borrowers and other borrowers of color were cost burdened. Although the share of cost-burdened white homebuyers also increased from 2021 to 2022, most new white homebuyers still were not cost burdened.

How policymakers can prepare for interest rate easing

With rates high and less than 1 percent of the mortgage market refinancable, policymakers can start thinking about how to streamline and remove refinancing barriers. Better access to refinancing will allow cost-burdened new borrowers who typically have less housing equity than more tenured homeowners to take advantage of lower rates when the Federal Reserve finishes its rate-tightening cycle.

Studies have shown that less affluent borrowers are less likely to refinance, as are Black and Latine borrowers, which led to a missed opportunity during the pandemic-induced refinancing wave. Freddie Mac showed, in January 2021, that nearly 50 percent of Black and Latine borrowers with Freddie Mac mortgages could have saved more than $100 a month by refinancing, and nearly 20 percent could have saved $200 a month. Studies have estimated that the typical borrower who refinanced in the first 10 months of 2020 saved $279 a month, leading to cumulative savings of $5.3 trillion a year. Only 3.7 percent of these total savings went to Black borrowers, who compose 9.8 percent of all homeowners.

Policymakers can learn from the missed opportunities of the last refinancing wave by using these data on borrowers’ cost burdens to create policies that will make refinancing more equitable.