In the wake of the COVID-19 pandemic, the United States Federal Reserve (commonly referred to as “The Fed”) slashed the federal funds rate to respond to fear and uncertainty due to lockdowns, layoffs, and economic instability. This move was made to make it easier for consumers and businesses to borrow money and spend, spurring economic growth during a difficult time around the world.
However, there can be negative effects when money is cheap and easily accessible. The lower federal funds rate ultimately led to significant borrowing and spending, which heated up inflation to near record highs. Now, to discourage spending, The Fed has begun hiking interest rates rapidly in an attempt to squash the pinch of inflation that Americans are feeling everywhere, from the gas pump to the grocery store to the housing market.
With more hikes on the horizon and inflation still running hot, how are these interest rate increases affecting homebuyers? There are a few things to consider in a rising interest-rate cycle for those in the market to buy.
Higher Mortgage Payments
The most obvious result of increased interest rates is higher mortgage payments. The cost of borrowing goes up, which means the installments to pay down the loan go up as well. Given that mortgages tend to be large loans, a single interest rate increase can have a huge impact on a homeowner’s monthly or bi-weekly payment when they finally sign on the dotted line and take possession of their new home.
Consider a basic example of a mortgage amounting to $400,000. At 5% interest, the monthly payment on a 30-year mortgage works out to be $2,147.29. Bump up that interest rate to 5.5% and the monthly payment jumps to $2,271.16. That half-percent increase represents a $123.87 difference in monthly payments.
Those with fixed-rate mortgages will be unaffected by these rate increases until they choose to buy a new home. However, people with adjustable-rate mortgages will begin to feel the pinch as less money goes toward the principal on their loan or they are forced to increase payments to keep in line with their amortization schedule.
Fewer Buyers in the Market
In addition to those that adjust their expectations when looking for a new home, there will be some people who simply cannot or choose not to buy while interest rates are high. They could feel it’s best to wait for rates to come back down or they may simply not be able to qualify for the mortgage that they need with the prospect of higher payments.
This is an intended consequence of raising interest rates. Home prices were one the biggest drivers of inflation in the last two years and The Fed hopes that higher rates will cool demand in the housing market.
For buyers who are paying cash or can manage higher interest rates, this may mean less competition from other buyers and lower prices for new homes hitting the market. There is a potential opportunity if buyers are still willing to make a purchase during a time of higher rates and uncertainty of future rates.
High Interest Rates Make Motivated Sellers
While mortgage rates are increasing, once a rate is locked in, the homeowner can have some certainty about their payments for the duration of their mortgage or until they choose to refinance. This is not the case for those carrying revolving credit like a home equity line of credit (HELOC).
A HELOC has a variable interest rate, which means that it will fluctuate as interest rates change. Someone who was enjoying a low rate as recently as last year may have seen their interest payments spike and, with more increases on the horizon, should expect to continue seeing those payments increase into next year.
What was once a manageable revolving loan for some families may now be a burden on their finances. There may be some who choose to sell their home if they cannot aggressively pay down their debt. Combined with fewer buyers in the market, this could very quickly shift the market in favor of buyers who are not as affected by interest rates, such as investors with cash on hand or homeowners who have been saving large down payments and sitting on the sidelines during the heated housing market seen in 2021 and early 2022.
Same Payment, Less House
With higher rates, buyers will find that they qualify for less money when taking out a mortgage. Although their payments may look the same, the amount of money they are approved for when shopping for a home could decrease dramatically. If house prices fall, this may not be a major concern. However, inflation has proven to be difficult to cool down and it may take some time before the housing market adjusts to the rising-rate environment in which buyers are operating.
For many buyers, this may mean fewer homes in their budget. It may also mean that they need to adjust their expectations or look in a wider range of communities to find the home that checks off all the boxes.
How Janus Title Can Help
Buying a home in a rising-rate environment can present both challenges and opportunities. For buyers taking out a mortgage to purchase their home, it’s important to understand the period in which their pre-approval rate is guaranteed. Many lenders will only offer a rate for a fixed period, as little as 30 days, before the buyer must either close on a home or re-qualify at a potentially higher rate.
Any delay in the closing process could prove costly should mortgage rates increase. With the exclusive Qualia Connect platform and the Janus Turnaround, Janus Title delivers title insurance and helps complete the closing process faster than any other title agency. This ultimately means less risk that buyers will fail to close in time and secure the rate they were counting on.
With decades of combined real estate industry experience and partnerships with some of the top real estate professionals today, Janus Title is helping buyers navigate these uncertain times to find opportunities and feel comfortable with their choice.
To learn more, contact Janus Title today.
Doing a title search and getting title insurance is a standard practice of the home buying process that many people are not prepared for, especially if they are buying a home for the first time. Prepared or not, lenders require buyers to get title insurance as part of the closing process.
From a buyer’s standpoint, it’s important to understand the value and importance of title insurance. More than just a requirement, title insurance is a necessary tool to protect against costly and unexpected dangers lurking on the title of the home in question.
With a better understanding of why a title search is done and why title insurance is so important as part of the closing process, buyers can feel confident when it finally comes time to sign on the dotted line.
Watch Out for Liens
One of the main things that real estate lawyers are looking for when working on closing a deal is whether or not there is a lien on the title of the property in question. A lien is a financial claim to the property, usually from the bank or lender that the previous homeowner used to purchase the home. Since the home is used as collateral to secure the mortgage, the lender wants to protect themselves in the event that the homeowner is unable to pay the mortgage.
These liens from lenders are not uncommon and not necessarily something to worry about. A title search will help confirm to the lawyer who the lender is so they can ensure payment is made out to the lender in order to discharge the lien and allow for the new homeowner to take ownership and, if needed, have their lender put a new lien on the title.
However, there are some occasions where a lien is on a title that is unexpected and could pose problems when completing the deal. Mechanic’s liens are an example of this. With a mechanic’s lien, it means that someone has done work or improvements on the house and was not paid within the agreed-upon timeframe. Builders and contractors will place a lien on the home to ensure it cannot be sold without their debt being paid off first.
This kind of lien does not necessarily have to turn a deal upside down and stop it from moving ahead. However, real estate attorneys need to ensure they pay out all liens and have the claims discharged before completing the deal. If the new owner were to take ownership with liens on the home, then they would become liable for the debt.
The Tax Man Cometh
Another title defect that will catch the eye of a real estate lawyer is a claim for unpaid or “back” taxes. Cities and counties have the right to place a claim for back taxes on the title of a property. In extreme cases, the property could eventually be sold at auction to recover the tax debt owed. However, that can be a drawn-out process and may not be completed by the time a house goes up on the market. With a title search, a lawyer can verify if back taxes are owed. Much like in the previous example of a mechanic’s lien, back taxes do not necessarily kill a deal on the spot. However, it does give lawyers an extra bit of work to do in ensuring that the taxes are paid before remaining proceeds are distributed to the seller.
If a title search wasn’t done and the buyer was unaware of back taxes, they would then become responsible for paying those taxes. Should they be unable to pay the tax bill, they could face the very severe consequences of having their home sold at auction by the county to cover the taxes owed. Needless to say, this would be a devastating experience for any homebuyer.
Other Hidden Details
Something that title searches will show are easements. These are incredibly common and typically apply to the utility lines on the property so they can easily be accessed by utility workers for repairs or upgrades. With that said, there are other easements that are less common and may be an important consideration for buyers before completing the closing process.
An example of a less common easement could be a private easement where the previous homeowner made an agreement with someone else for access to their property. For example, a neighbor may have been granted an easement to build a large shed across a portion of the property. This type of agreement could ultimately affect a new homeowner’s enjoyment of the property.
Some title defects are so hidden they won’t even show up on a title search. An example of this is a builder who places a lien for renovations done before the previous owner sold but it was not added to the property title before the closing. This kind of “hidden” danger in a title is exactly why lenders require title insurance and it’s strongly recommended even if a buyer isn’t working with a lender. A title search can only catch details present at the time of the search. Title insurance provides peace of mind for lenders and buyers in the event that a title search is unable to capture a very important detail.
Closing with Confidence
A title search and title insurance go hand-in-hand when closing. With a clean title and insurance to cover those unexpected events, buyers can move ahead with confidence when closing on their purchase.
Janus Title offers decades of combined industry experience as well as a technology-forward platform that makes the closing process fast, easy, and efficient.
To learn more or connect with the team on future deals, contact Janus Title today.