Most people understand that interest rates have an impact on the housing market, but many don’t understand the exact correlation between the two. Simply put, mortgage interest rates can influence how much you will eventually pay for a property over the life of the loan, and they can also factor into how much home you can afford.
Beyond that, mortgage interest rates can also impact the value of real estate. When interest rates are low, housing demand typically goes up, along with the prices of homes. When mortgage rates are high, demand and home prices typically go down.
How Can Higher Mortgage Rates Affect the Homebuying Process?
1. They can reduce the amount you’re qualified to borrow.
The maximum mortgage amount you’ll qualify for is based largely on the size of your down payment and what you can afford in terms of a monthly mortgage payment. A lender will usually determine how much of a monthly payment you can afford by examining your debt-to-income ratio.
And since the higher the interest rate, the higher your monthly payment will be, a high mortgage rate can greatly decrease your buying power. This can be particularly challenging for first-time homebuyers, who often struggle to save up a sizable down payment that could otherwise qualify them for a reduced rate or a higher loan amount.
2. They can make it difficult to find a home in your price range.
Home prices don’t always fall as quickly as mortgage rates shoot up. Following the COVID-19 pandemic, the U.S. - and MA and RI in particular – saw unprecedented low levels of homes for sale. And, when there aren’t enough houses on the market to meet buyer demand, home prices remain at higher levels. Because of this, and because higher interest rates typically reduce how much you’re eligible to borrow, it can be very challenging to find a home that you can afford when rates are high.
3. They result in higher monthly mortgage payments.
Your monthly mortgage payment is comprised of principal and interest (and oftentimes it includes homeowners insurance and property taxes as well). Your principal is the repayment of the amount you borrowed, while interest is the premium you pay to the lender in return for being able to borrow the money. The amount of interest you’ll owe is determined by the interest rate of your loan. So, the higher your interest rate, the more you’ll pay each in interest each month.
For example, if you were to borrow $250,000 with a 30-year mortgage at 4% percent, your monthly mortgage payment (not counting property taxes and insurance) would likely be around $1,194. Compare that to the same loan at a 6% rate, and your mortgage payment would be closer to $1,499 per month. Using a mortgage calculator can help you get a better feel for how interest rates can impact your monthly payment.
It’s important to understand how mortgage rates influence the homebuying process, so you can be a more prepared and informed buyer. The good news is that there are several ways for homebuyers to navigate today’s challenging housing market, including homebuying grants, local mortgage programs, downpayment assistance, and lender-specific offers.
If you’re a MA or RI homebuyer in need of some guidance, don’t hesitate to contact BankFive today. We have a dedicated team of local mortgage experts who can help you identify the mortgage programs and products that are right for you. Contact us today to schedule a consultation!