A pandemic, global unrest, and national rising inflation: just one of these things is enough to send the economy into a tailspin. When you factor in all three and then some more, we have lots of potential home buyers and sellers feeling more hesitant. While there is not a crystal ball to predict the future, we can take a look at what the rising interest rate mean to buyers and how buyers have responded in the past to them.
What is an interest rate?
An interest rate is the amount of money a lender chargers a borrower on top of the principal of a loan. Whether it is a mortgage, student loan, or credit card, interest rates are one of the ways a lender makes money. In attempts to slow the rising inflation rate, the Federal Reserve increases the interest rate. The rate increase for banks to borrow funds between each other then trickles down to interest rate increases for other services like mortgages.
How can an increase in interest rate affect buyers and sellers?
For buyers looking to purchase a home with a mortgage, increased interest rates means that their money doesn’t go as far. A bank that may have pre-approved a buyer for a 400,000 dollar home may now only approve them to spend 355,000 due to a rise in rates. Likewise, a buyer’s monthly mortgage payment will increase which may influence the amount of money they are willing to spend.
For sellers, a rise in interest rates may mean fewer buyers available to purchase a home. This may lead to price reductions.
The interest rate and the housing market
Don’t give up yet, there is good news! The housing market isn’t just based on interest rates; there are lots of factors that affect the housing market. Despite rising or falling interest rates, there will also be a group of people that have to move. Whether it’s a job relocation, being in the military, or changed family circumstances, these people don’t have an option to sit and wait for the perfect time to make a life change. Even during a global pandemic, the housing market continued.
For the past few years, we have enjoyed historically low interest rates. Thirty years ago, the rates were around eight to nine percent. Before that, in the 1980’s, my parents saw interest rates near 17% as they moved around the country with the military. During all these times people were still in need of housing. So while a 5% rate looks mountainous to us, historically it’s more mole hole size.
What does this mean for me?
As a buyer or seller it’s always vital to be well informed so that you can make the best decisions based on your particular circumstance. Speaking with a mortgage professional who can help address your concerns and help you better understand your home buying budget is key to a successful home search. While you can’t control the interest rate, you can control how you spend your money. They may even be able to suggest other strategies for you to try to increase your credit score and improve the type or amount of loan you are eligible to receive.
