Although home prices have reached some of the highest levels on record, some economists warn that rising interest rates could stop this trend soon. With more inventory entering the market, forecasters are predicting the real estate market is beginning to cool. Higher interest rates could accelerate this process by making it more expensive for prospective buyers to get mortgages, limiting demand.
What Are Interest Rates?
The interest rate on a loan is the percentage of additional money that a bank or other lender charges on top of the principal, which must be repaid by the borrower. While these rates can vary, they generally follow trends dictated by the Federal Reserve (also known as the Fed), which determines the rate at which it lends money to banks. This, in turn, determines the rates that banks charge borrowers, since the purpose of a bank lending money is to make money off of the repaid interest.
How Does the Interest Rate Affect Mortgages?
As a general rule, the higher interest rates go, the more expensive it is to borrow money. This means that the same mortgage can become more expensive to repay if someone chooses to take out the mortgage after rates have gone up, compared to how expensive it would be if they borrowed at lower rates. Higher interest rates are likely to have the largest impact by making monthly payments on mortgages more expensive. With most mortgages involving hundreds of thousands of dollars, even a fraction of a percent increase in interest can cost a borrower thousands of dollars in additional interest.
Why Have Interest Rates Been Going Up?
Interest rates have been rising as the Federal Reserve has increased its interest rate, spurring banks and other lenders to increase their own rates. For several years, the Federal Reserve had kept interest at near zero in order to encourage borrowing and spur the economy. With inflation on the rise, however, the Fed has increased its interest rates, precisely to limit borrowing, including getting mortgages to purchase real estate.
How Does This Affect the Real Estate Market?
As rates rise, previously affordable homes may become too expensive for some buyers to afford. This can have a chilling effect on demand, causing people to think twice about buying a home, just as more homes are starting to become available. As a result, home prices may start to fall, as people look to lower their prices to entice buyers into purchasing.
At Liongate Homebuyers, we assist our clients with a variety of services related to buying and selling real estate. We have experience handling real estate financing, especially for developers and house flippers. If you are interested in selling your home for cash, please contact us at 516-548-6553, or visit our contact page.
