For a significant period of time, mortgage interest rates remained within a somewhat, fixed area, often approximately 8.5%. They greatly increased, in the late 1970’s, when a fixed – rate mortgage, has approximately, a 14% or greater rate. In the past decade, or so, we have been experiencing historically, low rates, which have helped the housing market recover and rebound, from the recessionary economics, of the earliest part of the 21st century. It appears, we will soon be experiencing somewhat of an increase in these, and witnessing, how our housing market reacts and responds. With that in mind, this article will attempt to briefly examine, consider, and discuss, whether, and why mortgage interest rates matter, focusing on 4 examples.
1. Most people make decisions more on their monthly payments: While the amount of one’s down – payment, is based on the selling price, of a house, for most people, the most significant consideration, is often, the amount of the monthly payment, and whether, it is affordable, and if they will qualify! When the rates rise, the amount of one’s mortgage payment goes up and depending on the amount borrowed, sometimes, to a significant degree. These payments are broken down into principal, interest, real estate taxes, and escrow (including taxes, insurance, etc).
2. The lower the rate, the more one can afford: Lower rates mean being able to afford higher – priced houses, while higher ones, translate to the opposite effect! If rates rise significantly, therefore, it is entirely possible, it will translate to lower selling prices, especially, in the upper ends, of the real estate market!
3. The effect on pricing: One must recognize and understand the inverse ratio/ impact of the monthly carrying charges, and what houses might sell for! The less expensive it is, to carry and maintain, these monthly payments, the higher the prices, houses will generally sell for! Doesn’t that make sense?
4. Qualifying for a mortgage: Lending institutions make many of their decisions regarding whether one qualifies, for a particular loan, based on ratios, one of which considers, the monthly costs of carrying the loan, to the overall monthly payments made, and one’s income! When it becomes far more challenging and difficult, to qualify, fewer buyers will often translate to transforming market conditions, from a seller to a buyers market! What do you think that means, to selling prices?
How interest rates rise or fall, and how potential home buyers perceive it, as well as its impacts on costs, are major factors in the housing market! One should remain aware of these changes, and prepare accordingly, and in a timely manner!