Buying a home while interest rates are rising
The past few months have been a financial whirlwind for many. Inflation has destroyed free funds and behavior left and right. This “invisible tax” has raised the price of everything we buy, and to tame it, the Federal Reserve is raising interest rates at an alarming rate, soaring since the beginning of the year. For context, every 0.25 percentage point increase in interest rates equates to $25 per year in interest on 10,000. At first glance, this seems like a small amount, but over time, especially with a mortgage, this amount increases. With prices rising so quickly, the journey to owning a home can be a little more complicated and nuanced. Today we discuss the impact of these rising interest rates on potential home buyers.
Why are interest rates rising?
Interest rates determine how much we pay back for everything from personal loans, car loans, credit cards and mortgages. Of course, the more we have to pay back, the more reluctant we are as consumers to take on debt. This recent and drastic increase in interest rates was a deliberate effort by the US Federal Reserve, or Federal Reserve Bank, to curb inflation. As prices were astronomically high due to inflation, the Federal Reserve tried to curb spending by raising interest rates.
A double-edged sword with this decision will affect the home buying business. These rising interest rates are currently making it more expensive for potential home buyers across the United States to obtain a mortgage. The current average mortgage interest rate in August 2021 is 5.63%, which is 28% more expensive than in August 2021. Higher interest rates have less impact on home purchases, which reduces demand and, in most cases, home prices. This creates a friendlier environment for those looking to buy a home compared to those looking to sell.
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Buyer’s Market vs. Seller’s Market
Days of homes flying off the block in less than a week in the background. Rising interest rates have created a built-in cooling of the market, at least on the price side. The paradox is that when interest rates are low, more people buy homes, which drives up prices. As interest rates rise, the market becomes more of a buyer’s market as demand slows. One thing that continues to make the market difficult for buyers is that inventories are still relatively low, but off record lows in January.
With stocks low and prices still rising slightly, this leaves buyers between a rock and a hard place. Simply put, this means higher monthly mortgage payments and higher total costs over the life of the loan. With headline inflation easing slightly to 8.5% in July, the Fed will likely have more room to raise interest rates to curb further price increases. The silver lining is that mortgage rates average around 7 percent, so current rates are still about 1.5 percentage points below that. Here are actionable steps you can take to make yourself a good candidate for lower rates.
Credit Score Prioritization
The biggest catalysts for improving and maintaining your credit score are reducing and/or eliminating high interest debt and paying it off on time. Search 7
0 for the best prices.
Don’t be afraid to shop around
Check multiple locations to see which prices are best for you. Even a quarter of a percentage point (0.25%) can make a difference on a 30-year mortgage.
Analyze Your Goals
For some, owning a home is the primary way to build wealth. By analyzing whether it is the best time and consulting with your financial advisor, you will know if now is the right time for you.
Make it personal
There is a lot of useful and confusing information about market developments. After all, no one knows the future, and diving into what is possible in your personal financial situation is the most important thing. Personal finance is always personal, so keep that in mind as you optimize your credit score and shop around for the best rates so you can best invest in an investment property, second home or dream home.
Happy House Hunting!