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How Rising Interest Rates Affect Buying or Selling a Home

Buying a home can be intimidating because of the various mortgage types, rising interest rates, and low inventory. Working with local real estate and mortgage professionals will help make the home buying process less frustrating. Industry experts can help guide you through each step and outline the best options for your unique situation. 

If the rising interest rates are making you hesitant to buy or sell, understanding the impact it has on your purchase or sale can help ease your worries when deciding whether now is the best time to make your move. 

What Are Mortgage Interest Rates?

Most homebuyers do not have the full purchase price in cash and must obtain a loan to purchase a property. This is where mortgage interest rates come into play. Since most mortgages are for 30 years, the interest rate and loan choices made during a home purchase can impact your finances for up to that length of time. 

Factors that can Affect Your Mortgage Interest Rate

  • Credit Score
  • Down Payment Amount
  • Home’s Purchase Price
  • Home’s Location
  • Loan Type & Terms
  • Interest Rate Type
  • Purchasing Discount Points

Consumer Financial Protection Bureau provides more detailed information about how the above factors affect your interest rate. 

How Rising Interest Rates Affect Affordability for Homebuyers

A homebuyer’s purchasing power decreases as interest rates rise. This is because rising mortgage rates affect how much house a buyer can afford and the monthly payment for a mortgage. Only a 1% increase in mortgage interest can greatly affect a homebuyer’s purchasing power.

For example, with a $400,000 home purchase at a 4% interest rate, the monthly payment would be around $1,900, and an increase to 5% could increase the monthly payment by around $238. Therefore, homebuyers may not qualify for the higher purchase price desired as interest rates rise. 

While mortgage rates currently average 5%, the rates are still historically low. Therefore, most homebuyers are still in a good position to move forward with their property purchase plans. For “guestimating” your house payment amount at 5% interest amortized over 30 years, plug in $6 for every $1000 borrowed.

How Rising Interest Rates Affect Home Sellers

As you may have guessed, if rising interest rates affect buyers’ buying power, it will also affect home sellers. For example, while a seller may choose to list their house at $400,000, potential buyers may only be able to afford the home at $355,000 due to only a 1% rise in interest rates. Therefore, home sellers can often still profit by selling, but the market value often drops as mortgage rates rise to balance the market. 

Rising Interests are Not the Only Thing Affecting Property Values

Hypothetically, mortgage rates correlate directly to housing prices and property value. However, changing interest rates are not the only thing that one must consider. The economy’s health is a key factor in determining the housing market’s status. If the economy continues to grow at a rate that curbs rising mortgage rates, the higher monthly mortgage payments do not have as big of an effect on homebuyers. This is because wages grow enough to compensate for the rising interest rate. 

While the housing market may seem difficult to break into now, talking with a knowledgeable real estate agent can put your mind at ease and help you navigate the changing housing market. Whether buying a home, selling, or both, working with a real estate agent will help you successfully accomplish your real estate goals. We’re here for YOU!

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