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How Do Rising Interest Rates Affect My Ability to Buy a House?

Posted by admin on June 8, 2022
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Suppose you’ve been keeping up with the news. In that case, you might have heard that the Federal Reserve is increasing interest rates to help stabilize the economy. However, you might not be too familiar with how rising interest rates affect the average American citizen. Such things are rarely ever explained by news outlets and the federal government. 


In this article, we will be talking about how interest rates might affect your ability to buy a new house. Then, we will look at how you get around raising interest rates to help you get your ideal home.


Rising Interest Rates Increase Your Monthly Payment

When the Federal Reserve (or Fed) raises interest rates to stabilize the economy, it impacts everyone and every industry with a loan. Among those loans that the Fed raises are mortgage interest.


Yet, it is essential to understand that mortgage interest rates are influenced by your financial circumstances and the general economy.


As mortgage rates increase, your affordability decreases from the buyer’s perspective. 


Let’s run some hypothetical numbers to illustrate this point. Assume a buyer considers a 30-year fixed mortgage on a home worth $400,000; her monthly payment would be $1,900 at a 4% rate.


But if you raised the rate to 5%, that payment would rise to $2,138. A 1% increase in the interest rate grew the monthly payment by $238, approximately 13%.


Raising Interest Rates Might Force Sellers to Sell Their Houses at a Lower Rate

When interest rates go up, fewer people tend to buy houses. In addition, rising rates make homes more expensive for buyers, resulting in lower market demand. As a result, the market can favor the buyer instead of the seller, especially if the demand for houses is low. We call this a buyers market.


Owners would likely need to reduce the prices of their homes to attract eligible buyers. A likely result is selling their homes at a lower price.


Consider an Adjustible-Rate Mortgage (ARMs) 

For some buyers, it makes sense to consider an adjustable-rate mortgage (ARM) instead of a fixed loan to deal with rising interest rates and the housing market with low inventory.


With an ARM you don’t have a fixed interest rate for the life of the loan. Instead, the interest rate is set for a certain number of years before transitioning to a variable rate. An ARM may make sense for buyers when there is a significant gap between fixed and variable mortgage rates and if the following will occur during your fixed-rate term:


  • You’ll sell the property
  • Interest rates will decline, allowing you the opportunity to refinance into a fixed mortgage
  • Your rate caps are manageable, and you can still afford the home during a variable period.


The bottom line for fixed vs. adjustable-rate mortgages is when interest rates rise – it’s worth considering an ARM.


Navigating Home-Buying Might Be a Little Tricky, But It’s Worth It

If you’re new to this process, trying to wrap your head around interest rates, the economy, the loan process, and actual house-searching might seem like it’s all a bit too much. However, you have to remember that it’s all worth it! 


In addition to resources at your financial institutions, a licensed real estate agent can be beneficial to solving your home buying challenges. Finding the right mortgage depends on receiving professional advice from a seasoned real estate expert. In addition, working with an expert will make you feel more confident and secure with your financial decisions despite the current interest rates.

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