Whenever the topic of buying homes comes up, someone in the conversation will likely talk about interest rates. Don’t be upset or hard on yourself if you aren’t aware of why and how interest rates impact the real estate market. Some people have bought several homes and can’t fully articulate how these two things correlate.
One of the reasons why people get thrown by this topic is because of the Federal Reserve. The Federal Reserve is the central bank of the United States. You’ve likely overheard people talking about “the Fed” more when news outlets report that the Federal Reserve intends to increase (or decrease) the interest rate. As someone planning on buying a home and looking for a loan, what does the Federal Reserve have to do with you?
It’s a great question, and the answer lies in the Federal Reserve’s mission to ensure a stable financial system and mitigate risks against our economy. In simple terms, interest rates are lower when the economy is in a recession or crisis. Inversely, when the economy is strong, interest rates are higher. Because banks use the Federal Reserve for overnight lending, they base their interest rate on the Federal Reserve’s rate. Generally, the best rate is referred to as a “prime” rate, which is about 3 points higher than what the Federal Reserve charges. However, you can expect your rate to be higher if you have a poor credit score.
How This Extends to Home Prices
As a potential homebuyer, you understandably want to know how these rates affect you. Three things can alter how much your monthly mortgage payment is:
- The sale price of the home
- How much money you put down
- Your interest rate
The higher the interest rate, the greater your monthly payments will be. Look at the following examples:
Example 1: A $250,000 house with a 30-yr fixed rate of 7% equates to roughly $1,663 a month (excluding taxes, fees, HOA, etc.)
Example 2: A $250,000 house with a 30-yr fixed rate of 9% is about $2,012 a month.
Example 3: A $210,000 house with a 30-yr fixed rate of 9% is about $1,690 a month.
If the most you can afford is $1,700 in mortgage payments, you may only be able to afford a $250,000 house if the interest rate works in your favor. If you look at examples one and three, you will notice that the payments are roughly the same. For that to happen, the home’s sales price had to come down to accommodate the higher interest rate. As interest rates go up, sales prices will likely go down. At the very least, it slows down appreciation.
Meet with an Experienced Real Estate Attorney
Look at example one again. Over the loan’s lifespan, you will pay close to $600,000. If absolutely nothing else, this blog should highlight what a significant investment your home is. The Auricchio Law Offices are here to protect you during a real estate transaction. We review every contract and ensure you know what you are signing and why. If something in the agreement could hurt you long-term, we will advise you on how to proceed. Contact us today to schedule a free consultation.
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