Jan 02, 2023 - 10m read
What Happens to Home Sales When Interest Rates Rise?
Over the past year, the Federal Reserve has increased interest rates several times and will likely do so a couple more times in 2023. While there are several reasons why interest rates have increased, these increases make it more difficult for potential buyers to purchase a home. A higher interest rate equals higher monthly mortgage payments.
Anthony Reinoehl
Co-Founder
Over the past year, the Federal Reserve has increased interest rates several times and will likely do so a couple more times in 2023. While there are several reasons why interest rates have increased, these increases make it more difficult for potential buyers to purchase a home. A higher interest rate equals higher monthly mortgage payments.
The interest rate that’s attached to your loan refers to the amount of interest you’ll pay over the course of the loan. Lenders charge interest as a type of fee that you pay to borrow money. Let’s say that you obtain a $100,000 loan with a 6% interest rate on a 30-year mortgage. Based on this interest rate, you’ll eventually pay the lender more than $215,000 before the loan is considered fully repaid.
Even though rising interest rates might be bad for buyers, it can also cause buyers to rush to purchase a home out of the belief that interest rates will continue to increase for the near future. Before you enter the market as a buyer or seller, you should know how rising interest rates can impact home sales. This guide offers an extensive look at rising interest rates and what they mean.
Should I Sell Now or Wait For Interest Rates to Fall?
When you’re buying or selling a home, there are numerous factors that should be considered, which include:
- What plan do I have for life and housing?
- What are the current real estate market conditions?
- Why do I want to buy or sell my home?
- What are the interest rates like and will they change soon?
- Do I want to work with a real estate agent or alone?
Selling your home is a life-changing decision that should never be rushed. If you’re ready to sell your home but believe that interest rates could drop further in the future and push higher demand among buyers, there’s also a possibility that interest rates will increase, which is why you shouldn’t delay your decision.
If you’re not ready to sell your home but want to make sure that you do before buyer demand drops off, an increase in interest rates doesn’t typically cause buyers to become much less interested in making a purchase. You should be confident in whatever decision you make.
Rising Interest Rates for Homebuyers
If you’re in the market to buy a home, rising interest rates are usually a negative thing. An increase in interest rates means that you’ll need to have more income and assets to afford a home at the same price. If you’re able to afford buying a $350,000 home at a 4% interest rate, this doesn’t mean that you can afford a $350,000 home at a 7% interest rate.
With a 4% interest rate and a 30-year mortgage, your monthly payment would be around $1,671. The same mortgage term with a 7% interest rate would result in a mortgage payment of more than $2,300. When you’re looking to purchase a home, affordability decreases when mortgage rates increase.
Make sure that you know how much you can afford and the amount that your lender is willing to give you in a mortgage loan. It’s possible that the increasing interest rates will make it more difficult for you to qualify for a loan.
Rising Interest Rates for Sellers
Whether you need to relocate for your job or want to downsize for a more affordable monthly payment, rising interest rates can impact your ability to sell your home. Let’s say that you want to sell your property for around $400,000. When interest rates are low, buyer demand is usually high, which means that you could receive multiple offers that are at or above your listing price. Borrowers are able to afford more in this scenario.
On the other hand, high interest rates could price potential buyers out of having the ability to make an offer on your home. In this situation, it’s possible that the majority of buyers would only be able to purchase your home at a price of $360,000. Keep in mind that buyers with a fantastic credit score can obtain a lower interest rate and might still make an offer on your home at your preferred price.
If you initially purchased your home for $300,000, selling it for $360,000 would net you a high profit. However, the more challenging market conditions would result in your home’s market value dropping. The amount of profit you make depends on how you react to the market. While interest rates will eventually stop increasing, it’s impossible to predict exactly when this will happen.
Rising Interest Rates and Property Value
Rising interest rates can create issues with property value, which is a problem that’s largely driven by how sellers and buyers are affected by this increase. Housing prices and property values are largely correlated with mortgage rates. However, this correlation depends on the health of the broader economy.
When an economy grows quickly, an increase in interest rates shouldn’t create problems with housing and properties values. Even though your monthly mortgage payment can increase considerably when interest rates rise, a healthy economy means that you could receive a higher income from your employer.
Rising Interest Rates and Real Estate Investing
When mortgage rates are rising, real estate investors can benefit in several ways. One issue that you should look out for is that more investors will be interested in purchasing rental properties because of the higher demand that occurs when buyers are priced out of homes.
On the other hand, rising interest rates might also result in prices being reduced, which means that it could be better to make an investment when interest rates are increasing. During these economic conditions, less real estate transactions occur because of the stricter lending standards, which results in more people needing to move into rental properties until they’re able to afford taking out a mortgage loan.
What Happens to Mortgages When Interest Rates Go Up?
When you notice that interest rates are increasing, this means that the cost of a mortgage will increase as well. Once homes become more expensive to buy, demand for them will decrease, which can lead to a lengthy slump in the real estate market. In the event that a seller is unable to obtain offers from potential buyers, they may need to lower the price of their property.
Are Rising Interest Rates Good for Mortgage Companies?
Rising interest rates are always viewed as a positive for lenders and other mortgage companies. When interest rates are high, the lender will earn more interest on the loans they provide, which allows them to collect more revenues over time. However, it’s possible for interest rates to be too high for lenders. If the demand for a mortgage or home drops substantially, the lender wouldn’t receive as much business.
Is It Better to Have Lower Closing Costs or a Lower Interest Rate?
The answer to this question differs depending on the individual and the situation they’re in. In most cases, it’s ideal for the total cost of a home to be less, which means that a lower interest rate would be best. While having lower closing costs can be helpful when you’re first buying a home, a lower interest rate means that you’ll spend less money on your monthly mortgage bill for the duration of the loan.
Is It Better to Buy or Sell?
When interest rates are increasing, this situation is more favorable for sellers as opposed to buyers. However, purchasing a home while interest rates are high doesn’t need to be avoided. The average interest rate on a 30-year fixed-rate loan is around 6.2%, which isn’t as high as interest rates once were. There’s also a good chance that interest rates will remain steady or begin to drop in 2023.
When the Great Recession began in 2007, interest rates were just over 6.4%. In 1996, interest rates were considerably higher for an average of 7.81%. A decade before, a mortgage loan would come with an average interest rate of more than 10%. If you want to sell your home, interest rates aren’t so high that there wouldn’t be any demand for your property.
You can bypass the entire process of waiting for the perfect offer while your home is sitting on the market by selling your home for cash. At CC Capital, we can provide you with a clear cash offer after you get in touch with us. We’ll perform a comprehensive assessment of your home to determine its value, after which a fair offer will be presented to you. If you accept the offer, the sale can close quickly. This home-selling process can be completed in three simple steps.
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