How Rising Interest Rates Impact Real Estate
Most buyers, particularly first-timers, will probably borrow money to purchase a home or other real estate property. The process consists of working with a lender to qualify for a home loan at a specific interest rate for a set amount of time. The homeowner is then responsible for making regular monthly payments to repay the loan.
Throughout the repayment period, typically 15 or 30 years, the lender holds a lien on the property to ensure they will repay the loan on time.
Impact of Higher Interest Rates on Buyers
While rising interest rates can signify a robust economy, it is not necessarily good news for the homebuyer.
Prospective homebuyers will find that higher interest rates for a home loan typically result in higher monthly payments, pushing the payment beyond their budget. Higher interest rates may also mean that buyers will need to look for a home in a lower price range than was initially intended.
Simply stated: higher interest rates translate to higher loan costs and a higher monthly payment for the borrower.
Here’s an example:
Assume a couple finds the perfect home for their needs listed at $300,000. They have already saved a down payment of 20%, which is $60,000. That means they will need to borrow the balance ($240,000).
- If the interest rate is 3% for a 30-year loan, the monthly payments would be $1,011.85.
- If the interest rate rose to 5% for the same 30-year loan, the monthly payments would be $1,288.27, an increase of $276.42.
As interest rates rise, homebuyers may find they need to make a larger down payment or pay a higher interest rate for their “ideal” home. Or they may need to consider a less expensive home.
Impact of Higher Interest Rates on the Seller
While higher interest rates may affect the prospective buyer’s ability to purchase a home in a particular price range, interest rates also affect the home seller. As interest rates rise, home demand decreases for higher-priced homes, leaving fewer prospective buyers to compete for the property.
When buyer demand falls for a property, the seller may consider reducing the price to attract more prospective buyers.
Impact of Higher Rates on Real Estate Investing
Higher rates can sometimes create a double benefit for real estate investors. Those who buy homes to rent may benefit from lower home prices resulting from the rising interest rates.
In addition, investors are likely to experience a greater demand for rentals when fewer individuals can qualify for a home loan.
Finding a Knowledgeable Realtor
An experienced Realtor understands the demands of the local real estate market and helps prospective buyers and sellers establish realistic expectations. Guiding real estate transactions through a fluctuating interest rate environment and an ever-changing marketplace is their “stock-in-trade.” Plus, professional Realtors always have current housing market information.
Because interest rates play a critical role in almost every real estate transaction, an experienced Realtor can help provide homebuyers advice about lenders and potential borrowing options. Consulting a reputable, experienced Realtor should always be the first step when pursuing any real estate transaction.