How Will Rising Interest Rates Affect Your Home Purchase?

Recently it came out in the news that in order to attempt to curb inflation, which has hit an unprecedented 7.5% in just this last year alone, the Fed will likely be raising interest rates 2 whole basis points, in order to stall and combat the out of control interest rates.

While that sounds big, let's take a look at how that will affect you as a borrower, because it will affect you a lot, and when we are meeting with our buyer clients for the first time we often have this discussion.

But first, full disclosure: We are real estate agents, not lenders. We do not do quotes, rate terms, or anything else to do with getting a loan. What we have are competent licensed lending partners that we will refer you to for all of your lending needs.

Take note that just because the Fed raises the interest rates, that does not automatically raise interest rates on mortgages. What it does do is raise the interest rates that banks borrow money from the Fed, which in turn causes mortgage lenders to raise rates on the money it lends, i.e home loans. And also lenders do not usually wait until a rate hike is in full effect to start raising rates. We usually see rates start to creep up at just the mere announcement of the Fed raising rates, in order for lenders to hedge their bets a bit against the coming raise.

Let's take a look at how that would apply in a real-world scenario. Let's say that you are approved for a $500,000 home loan at a 3.5% interest rate, and interest rates rise by 1% to 4.5%, just half of what it's expected to rise this year. Your purchasing power will be decreased by approximately $100,000, taking your pre-qualification amount from 500K to 400K.

Now you might be thinking, “But wait, Lucas, if interest rates rise, will home prices go down?” My answer to that is yes, eventually, however with current inventory levels at record lows, even with rising interest rates, prices will probably continue to rise until we see an increase in inventory and a normalization in inventory levels.

As inventory levels rise and in combination with the sheer number of home buyers priced out of the market, we'll eventually see a slowing down of the market and a decrease in home prices. But again, only when there are more homes available for sale and the number of qualified buyers has decreased by a significant amount, will we see prices start to come down.

Now your question might be, “When will that happen?” Well, your guess is as good as mine. As far as what the “experts” are saying, it could be 2-5 years before we see this take effect.

In the meantime, if you are thinking about buying a home and “waiting for prices to come down,” I hope that this has given you some clarity in regard to your home-buying decision and timelines.

If you have had this conversation with an agent or someone in the business, and they have not been able to give you any clarity around when the best time to buy is, or if you're just frustrated with the process and you want to find a better way to buy a home, please give our team a call at (714) 406-1414.