The impact of mortgage interest rates on everyday people’s ability to achieve the American dream of homeownership has been a hot, trending topic. In 2018, the Fed raised interest rates an eye-popping four times much to the chagrin of buyers and sellers.
With the economy firing on all cylinders again, the single-family home inventory lagged behind the increasing demands by Millennials overwhelming the market. Although recent years were widely considered a seller’s market, buyers also appeared to be ahead in the housing game due to low monthly premiums.
Although the Fed backpedaled on further rate increases during the first quarter of 2019, mortgage interest rates are up from previous years. That means a home purchased at X-amount of dollars before 2018 will probably come with a bump in the monthly premium today. But the lingering question potential homebuyers continue to speculate about is how hard will the mortgage interest rates increase affect how much home you can afford to buy? It’s a fair question.
Do Interest Rates Impact Affordability?
Before panicking about home affordability, it’s important to consider current mortgage interest rates in a context. The Fed had strategically handcuffed post-recession rates for a lengthy period in an effort to buoy the U.S. economy.
The most recent upticks do not put rates even close to what they were 10, 20 or 30 years ago. Consider, for a moment, that a 30-year fixed rate was nearly 12 percent in the late-1980s. In terms of low mortgage interest rates, homebuyers should consider themselves well within a golden age of buying power. That being said, frugal home buyers still want to the best bang for their buck regardless of which way the prevailing mortgage interest rates wind is blowing.
When you purchase a loan product, the interest will be amortized over the entire life of the loan. Most loan products are front-loaded so that homeowners pay a significantly larger amount of their monthly premium toward interest. That results in lower home equity in the early years of a mortgage. As the loan ages, you tend to pay down the principal more substantially.
In terms of higher mortgage interest rates, that equation places homebuyers in a less enviable position. Homebuyers can expect higher monthly premiums on similar purchases than when rates were low. It also means that you will pay more toward interest over the life of the loan. On the surface, it feels like a double-whammy and that’s one reason some potential homebuyers get antsy when rates tick up a notch.
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What Impacts Mortgage Interest Rates?
It’s important to understand that rates are just one moving part in the massive economy and housing industry. Numerous factors impact whether home prices rise, fall or hold steady for periods of time. In fact, mortgage interest rates are themselves subject to powerful external forces such as the following.
Even a modest uptick in the overall cost of goods and services has a ripple effect throughout the economy. Lending institutions painstakingly track inflation with an understanding their interest rates must keep pace in order for them to remain financially sound in a realistic fashion.
- Economic Growth:
Two of the driving economic indicators that indirectly push up rates are the country’s gross domestic product (GDP) and employment. When these factors are decidedly prosperous, lenders generally anticipate an increased demand for loan products. The law of supply and demand dictates that lenders can charge higher rates for their limited amount of mortgage loans.
- Bond Market:
It may come as something of a surprise, but the U.S. government actually competes with the private sector selling bonds. Government bonds often hold the high ground because their repayment is guaranteed. That presses private banks and investment firms to compete by offering higher yields. This balancing act with money tends to have an indirect impact on what mortgage interest rates lenders offer.
- Housing Market:
Another influence on rates that may seem counter intuitive on the surface is that the state of the housing market can impact mortgage interest rates from within. Just as housing inventory shortages can prompt sellers to increase listing prices, fewer homes being purchases can force more competitive rates. In that respect, buyers may pay more for the home while enjoying a lower monthly premium and quicker impact on the principal. Of course, the opposite may hold true as well when there is more than adequate home inventory.
The bottom line of all this is that mortgage interest rates do not necessarily rise or fall in a vacuum. They are impacted by seemingly innumerable moving economic parts and at the whims of the law of supply and demand.
The Sunny Side of Rising Mortgage Interest Rates
While it’s obvious that paying a higher rate on a loan will ultimately be more expensive, an uptick in rates can prove beneficial for homebuyers as well.
Just as all the other moving economic parts can impact mortgage interest rates, increases may have at least an indirect impact on home listing prices. Sellers often get caught up in the common myth that rising rates cause people to hedge their bets on buying a home. That may cause them to rethink how much they can get in the housing market. You might not be able to draw up a math equation proving home prices dip when rates rise, but that tends to be the common wisdom.
Sellers tend to believe that rates result in fewer buyers. And, as the law of supply and demand dictates, less competition demands property sellers reduce prices.
How To Combat Rising Mortgage Interest Rates
Despite years of historically-low interest rates, increases are neither a new phenomenon nor likely to slip back anytime soon. It appears that at least slightly higher rates are the new normal. That being said, there are strategies homebuyers can employ to mitigate the impact on how much you can spend on your dream home. Consider the following:
- Lock In Your Rate:
This agreement with a lender allows you to set the mortgage rate with an understanding you will close on the property within a specified time frame. Some lenders offer an additional “float down” incentive that allows you to access a lower rate if one becomes available.
- Buy Points:
Paying cash upfront for lowered mortgage interest rates remains a tried-and-true option for homebuyers trying to maximize their buying power.
- Revisit Your Price Range:
Buying your dream home on a budget does come down to basic math. If mortgage interest rates are straining your budget, you can easily revise your maximum spending threshold. You might be surprised to discover properties equally compelling just a few ticks down from your initial budget.
Mortgage interest rates are part of a massive housing industry, and they are likely to have a variety of direct and indirect impacts on what you spend on your next home. But by considering higher or lower rates in a context, it’s easy to see they don’t present a significant obstacle in today’s robust economy.
This article is intended to be a general resource only and is not intended to be nor does it constitute legal advice. Any recommendations are based on opinion only.
Rates, terms and conditions are subject to change and may vary based on creditworthiness, qualifications, and collateral conditions. All loans subject to approval.