Hello World! Welcome Friends! If you’re looking for Highlands Ranch homes for sale, or if you’re looking for a house anywhere right now, for that matter, you’re going to be dealing with the effects of higher interest rates. Higher interest rates don’t necessarily mean that you shouldn’t buy a home or that it’s something to be intimidated by, but it does mean you should do your research, be prepared and plan accordingly.
It should also be noted that while interest rates on mortgages are up significantly from the start of 2022, there has been a bit of good news recently. In mid-November, mortgage rates took their largest single-day drop since 2009. The volume of purchase mortgage applications, as a result, went up 4%, as rates on a 30-year fixed mortgage went from 7.22% to 6.62%.
The drop in rates followed a decline in bond yields after the inflationary reading for October came in better than expected.
Even with the dramatic drop, higher mortgage rates can be a tough pill to swallow for many homebuyers, considering they were at historic lows at the start of the year.
What’s helpful to understand as you go into the process of buying a home right now is how higher interest rates ultimately affect your purchasing power and what you can do to budget accordingly.
An Overview of Rising Interest Rates and Homebuyers
In real estate, the conventional wisdom is that rising interest rates are going to make buying or selling a home harder. Decreasing rates typically make both buying and selling easier.
Let’s compare the difference between a 4% rate on a 30-year fixed mortgage worth $400,000 and a 5% rate. That 1% difference in interest rates would take a payment from $1,900 a month to $2,138. That means the 1% difference is equal to around a 13% increase in your payment.
Affordability will decrease as mortgage rates go up.
If someone qualified for a $400,000 mortgage at the 4% rate, they might based on their qualifications, only be able to qualify for a $355,000 loan with the higher rate. The individual’s purchasing power in this scenario has gone down by $45,000.
Sellers can also be affected. If you want to sell your home at $400,000, you can do so, but the same potential buyers can only afford your house at $355,000.
How Are Mortgage Rates Determined?
Mortgage rates are determined by a combination of factors within and out of your control. When you understand these factors it puts you in a better position to deal with the erosion of purchasing power you experience with rising rates.
A lender will adjust mortgage rates depending on how risky they think a loan is—riskier loans have higher interest rates. A lender will assess how likely it is that you’ll fall behind on payments or stop making them altogether. Factors relevant here are your credit score and the loan-to-value ratio.
The overall economy is a factor beyond your control. Mortgage rates tend to go down when the economy is slowing, unemployment is rising, and inflation is declining.
Inflation often comes with rising interest rates, as we’re seeing now. When prices go up, the dollar loses buying power. A lender will then charge higher interest rates as compensation. We had around a year of low inflation, so then there were low mortgage rates. Then as inflation started speeding up in 2022, mortgage rates rose rapidly.
The Federal Reserve doesn’t set mortgage rates. They raise and cut short-term interest rates in response to the movements of the economy. Mortgage rates will rise and fall according to the same forces of the economy. Mortgage rates and the Fed rates will move separately and independently from one another but almost always in the same direction.
You can comparison shop during times with high-interest rates because lenders are going to have different costs of overhead and different appetite risks, which means there can be pretty significant fluctuations in their offers.
If business is slow, a lender might charge lower rates, while if they have a lot of loan applications, they could keep them high.
Redfin Study
As interest rates have been going up, according to a recent study from Redfin, an online real estate brokerage, there are homebuyers who have lost up to $165,000 in purchasing power in the past year.
Mortgage costs have gone up by a median increase of 49%, so if you want to buy, you can afford less on the same budget.
At the end of 2021, if you had a budget per month of $2,500, you could afford a home worth around $517,500. As of the summer of 2022, the same buyer could afford a home worth up to only $399,750. As of June of this year, the median monthly mortgage payment in the United States was $2,391. If you had a monthly mortgage budget of $3,000, as of this summer, you lose $141,250 in buying power. For buyers with budgets of $3,500, they lost $165,000 in buying power.
What does all this mean if you need a new home?
It can have a few implications. First, consider a smaller home, or maybe you look at homes that aren’t in your ideal neighborhood.
Continuing to rent isn’t likely to be the best financial option because the price of rent is at record highs at well, so either way, your budget may get you less than it would have, but when you buy, you’re building equity.
If you’re able to put down more cash, that can help combat some of the erosion of your purchasing power. You can increase your down payment as a percentage of your loan, and you can also pay discount points. These are upfront fees that you pay to lower your monthly payment and interest rate.
Finally, you can also think about a hybrid loan with a fixed rate that resets at the end of a certain period and then might be fixed or adjustable for the rest of the term.
Click the links below for any posts you have missed:
Three Surprising Benefits of Replacing Your Roof
Insurance 101: Understand the Basics of Your Home Insurance Policy
These Things Will Help You Survive the Extremely Hot Temperatures That Are Coming
Simple Ways to Keep Your Home Heated This Winter
Key Steps That Will Help You Get the Best Possible Outcome from Your Home Renovation Project
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