How Do Changing Interest Rates Affect Today’s Homebuyers?

October 30, 2022

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.