Lenders, whether government-backed or private, compete for home buyer businesses in a free and dynamic market. This drives up or lowers average monthly interest rates for mortgage loans.
Based on correct housing prices, tighter credit requirements, and a decreasing surplus of unsold houses, the average interest rates on 30-year fixed mortgages have remained close to historic lows between 2013 and 2022, but have started rising in 2022. However, they are still at historically low levels.
Rising mortgage interest rates do not cause anxiety. Knowledge of the topic can help ease any fears. Housing market participants must be able to comprehend rising mortgage rates as they have an impact on every aspect of purchasing a home.
Rising Interest Rates and Homebuyers
The conventional wisdom in real estate is that higher interest rates can make selling or buying a house more difficult. Conversely, decreasing interest rates can make selling and buying a home easier.
Johnny Home Buyer would want a 4% interest rate on a 30-year fixed-rate mortgage on a $400,000 home. His monthly mortgage payment would then be $1,900. Johnny would pay $2,138 if he was eligible for a 5% fixed rate on a 30-year mortgage. Johnny’s monthly payment would rise by $238 if he has a 1% interest rate increase. This is roughly 13%. What does this all mean for homebuyers
A home buyer sees affordability decreasing as mortgage rates rise. Johnny Home Buyer is looking to get a $400,000 mortgage at 4.4% interest. However, based on his qualifications, the lenders are unable to offer him a loan of $355,000 because he has not met all requirements. Johnny’s purchasing power is reduced by $45,000 for every 1% increase in mortgage rates.
Johnny Home Buyer could have “qualified” for the $400,000 mortgage he desired before the Great Recession. This was during peak subprime mortgage madness.
To sweeten the deal, a subprime lender could have offered Johnny a 2% adjustable rate of interest for the first five years. Johnny will be responsible for at least 7 percent interest after five years. If interest rates rise, Johnny may have to pay more.
Sellers and rising interest rates
Sellers are also affected by rising mortgage rates, but in a different way. Jill may list her home for $400,000 if she wants to sell her house. Jill’s house is now only available to buyers who can afford it at $355,000 due to rising interest rates.
Indisputable, Jill can still make a profit from the sale. However, a 1% increase on mortgage rates reduces Jill’s market value by approximately $45,000.
How well she plays the markets will determine her profit. In essence, interest rates could rise rapidly and cause housing prices to crash.
Rising Interest Rates and Property Value
Homebuyers and sellers can notice the impact of rising interest rates. Hypothetical scenarios show that housing prices and property values directly correlate with mortgage rates. However, the economic health is what drives both of these scenarios.
Rising mortgage rates won’t have as much of an impact on housing prices and property values if the economy is growing fast enough. If mortgage rates rise one point, monthly payments will increase by $238. However, strong economies allow employers to raise salaries enough to compensate.
A rise in interest rates shouldn’t paralyze the housing market as long as the economy is growing and there are job growth and wage growth.
Rising interest rates and real estate investing
The impact of rising mortgage rates on real estate investment can be beneficial. Because fewer people are eligible for mortgages, the rental market will grow. However, rising interest rates can reduce prices so it is sometimes better to purchase during an increasing interest rate environment.
Furthermore, lending standards will become more strict as interest rates rise. This will result in fewer real property transactions. Renting properties will become more important until people can afford mortgages. An investor could make a fortune by investing 1% more in the right market for housing.
Do you want to buy or sell?
It is not a bad idea to buy a home when mortgage interest rates rise. Historical data shows that a mortgage rate of 5% is still very low. A mortgage with a fixed rate for 30 years is much cheaper than historical rates, according to data from Freddie Mac.
Since 2009, the average annual 30-year fixed mortgage rate has not exceeded 5%. The average mortgage rate at the beginning of the Great Recession, 2006 was 6.411%. In 1996, the average mortgage interest was 7.81%. Ten years earlier, in 1986, it was 10.9%.
What happens to mortgages when interest rates rise?
Mortgages are more expensive when interest rates rise. This is because the mortgage interest rate also increases. It becomes more expensive for homeowners to buy a home. The demand for homes decreases when they are more expensive. This causes a decline in the housing market. To attract buyers, sellers reduce the prices of their homes.
Are rising interest rates good for mortgage companies?
Companies that lend money to home buyers are rewarded with rising interest rates. A bank or mortgage company that earns more interest for a higher interest rate will be able to pay more. This leads to higher bank revenues. However, mortgage companies may be affected if they have to charge too much for mortgages.
What is better: Lower closing costs or lower interest rates?
It is up to you to calculate the numbers and work out which option is best. The best option for your home purchase is one that results in a lower total cost. This would typically be lower interest rates since you will be paying that interest rate for a longer time if your home is not refinanced. This could result in lower monthly mortgage payments and lower interest rates.
The bottom line
Buyers are encouraged by interest rates remaining at historic lows. Today’s market is home to some of the lowest debt that a homeowner will be able to acquire in the market.
The most important thing is to get the right advice from an experienced real estate agent professional who has sold many properties for others. Potential investors will feel more confident, knowledgeable, and secure in their financial decisions when working with an expert.