They Signed Contracts for Their Dream Homes Last Year. Now Their Borrowing Costs Are Ballooning.

Many home buyers who signed contracts for new homes in 2021 or early this year calculated monthly payments based on near-record-low mortgage rates of around 3% or less. But average mortgage rates have climbed this spring to 5.3%, according to

Freddie Mac,

as the Federal Reserve started raising short-term interest rates.

The difference can translate into hundreds of dollars more a month in mortgage payments—leaving buyers with the choice of swallowing the additional costs or walking away from the deal and potentially sacrificing the deposit.

Borrowers, so far, have been largely willing to absorb the added costs to keep their purchase, mortgage brokers and home builders say.

But the combination of fast-rising prices for new construction and higher mortgage rates is likely to thin the buying pool for newly built homes in the coming months.

Buyers of existing homes face much less interest-rate risk because they usually close within a month or two of signing a contract. Home buyers worried about sudden rate fluctuations can lock in a borrowing rate, often for a period of 30 or 60 days.

Buyers of new homes, which account for more than 10% of U.S. home purchases, often sign contracts and pay deposits several months before their homes are ready.

Supply-chain issues have slowed down construction times and delayed many home closings for additional weeks or months.

“It’s just introduced a lot of uncertainty and volatility into the consumer’s decision,” said Rick Palacios Jr., director of research at John Burns Real Estate Consulting LLC. “The chances of [the buyer] no longer being able to qualify for this home go up significantly.”

Builders can resell homes that fall out of contract to other buyers on their wait lists, Mr. Palacios said. But in an April survey by his firm, some builders reported that their wait lists of potential buyers are shrinking as interest rates rise.

When Lauren Sparks and Taylor Briggs paid a deposit on a new house with a yard in Savage, Minn., last summer, their loan estimate had a 2.875% interest rate. In January, they had the option to lock in a 3.75% interest rate for 75 days, but they decided against it in case the construction was delayed beyond the 75-day window, Mr. Briggs said.

“I had no idea that rates were going to explode as much as they were,” he said.

In February, the couple opted for a 45-day rate lock at 4.375% and paid more up front to lower their interest rate to 3.625%, Mr. Briggs said. The purchase closed in March.

Most buyers are stretching their budgets rather than giving up on the purchase, unless they are unable to qualify for a mortgage at the current rate, mortgage brokers and real-estate agents say.

Many buyers who agreed to purchase a home months ago are reluctant to back out of the deal and start shopping again. The number of existing homes for sale is near record lows and house prices continue to rise sharply each month.

Micah Barber and Stephanie Dodoo decided last year to replace their Austin, Texas, home with a bigger house on the same lot. They paid deposits to a builder in September and October and expected construction to start in January. When it was delayed and interest rates started to climb, they considered walking away, Mr. Barber said.

“There’s a quite significant difference, when you’re borrowing a six-figure amount of money, in paying 3.5% and paying 5.5%,” he said. “I have lost some sleep.”

They had initially intended to take out a fixed-rate mortgage but switched to an adjustable-rate mortgage with a fixed rate of 3.75% for the first 15 years after the home is built.

In response to rising interest rates, builders are helping buyers lock in rates.

Taylor Morrison Home Corp.

Chief Executive

Sheryl Palmer

said on an April 27 earnings call that the home builder had probably seen more rate locks of six, nine or 12 months in the past 10 days than in the last five years.

Mortgage broker Chris Robson in Fresno, Calif., said many of his clients who are buying newly built homes are opting for nine-month or 12-month rate locks, which can be obtained for a price above the current interest rate.

In some cases, he said, buyers who prequalified at lower rates have needed to pay down or refinance other debts, like car loans, to stay qualified at current rates.

On the plus side, some workers have gotten raises since they were prequalified nine or 12 months ago, which helped offset the effect of the higher interest rate, Mr. Robson said.

Bob and Anna Bergen signed a purchase agreement with a home builder in February, after struggling to find a home in the Detroit suburbs. They expect their house to be finished in early 2023.

“It’s exciting, but nerve-racking at the same time,” Mr. Bergen said. They haven’t shopped around for a mortgage yet, but he is budgeting for a 5.5% interest rate. The couple is also planning to list their current home next year when the new home is ready.

“The financial uncertainty is, I’d say, probably the highest point in any recent history, for how quickly the rates or the housing market could change,” he said.

Write to Nicole Friedman at [email protected]