What's The Deal With Interest Rates?
If you’re currently looking at buying a home, you may be asking yourself this question. The Federal Reserve raised interest rates on March 16 of this year in an attempt to control rising inflation. What does this mean for buying a home? What if you already own a home?
The Federal Reserve and Interest Rates
In 1913 the government established the Federal Reserve to help regulate the American economy and prevent economic fluctuations and downturns. The Federal Reserve is sort of a central bank that distributes currency and makes policies about money.
A part of that is regulating the amount of money in circulation throughout the American economy and raising and lowering interest rates. The theory is, if interest rates are higher (costing more to borrow money), people and businesses will borrow less money and the economy flows slower, which is supposed to help lower inflation.
How Do Interest Rates Affect Buying a Home?
When the Federal Reserve raised interest rates, banks were forced to pay more interest to get money, which they, in turn, charge you to borrow money. This means that the interest on any loan from lenders, including mortgage loans, is now higher than before. The banks pass on the higher interest rates they are charged to you, the consumer.
How do interest rates affect buying a home? Higher interest rates cost home buyers more money over the life of a loan. A mortgage loan with as much as a half percent higher interest rate can add to your monthly payment and your overall cost, because you are paying more to the bank to borrow the money.
Should I Fear Higher Interest Rates?
Not necessarily. If you’re focused on buying a home right now, and you’re financially prepared with an adequate down payment, go ahead and buy the home you want or need. Interest rates fluctuate and the housing market changes often. While yes the interest rates are rising, interest rates are still extremely low compared to interest rates in the 1980’s and 1990's. Also, if you’re poised to make a cash offer, you need not fear interest rates at all. An experienced Realtor® can help you decide if you’re truly ready to purchase a home now. Remember, interest rates can rise again, making now the best time to buy for a while.
If you’re selling a home, you may feel confused about selling right now. The sense of urgency to sell before interest rates increase is due to the effect the increased rates have on potential buyers’ power. Buyers will have to pay more to borrow money, causing them to be able to afford less than they previously could have afforded so they will want to negotiate more for a better price. Again, a seasoned Realtor® can help you with those decisions, including how to price your home to allow for negotiating, how to set up your home for viewing to make the best impressions and more.
Although the fear may have been negated, there is still a sense of urgency if you are buying or selling. If you’re buying, your buying power is reduced with every increase to the interest rate meaning you may not be able to get as much house. For this same reason, the pool of approved buyers has potential to decrease, so if you've been thinking about selling, you may want to act soon in order to take advantage of having more qualified buyers!
Jeff Cook Real Estate is the premier real estate firm throughout South Carolina, with many programs for helping you when selling or buying a home. Contact us today and speak with a team member about your concerns. We’re glad to answer your questions and help you negotiate the ever-changing housing market.