Unless you’ve been living in a cave for the last 6 years you know that interest rates have been at historic lows. If you have been living in a cave, then we can help you find a home; and now may be the last chance you have to take advantage of these historic low interest rates. Janet Yellen is expected to raise interest rates today, so it’s time to get on it!
Today, we aren’t going to go into the reasons that the rates have been so low, but we are going to talk about what we believe is going to happen in the near future and how that is going to affect you whether you are looking to buy or sell your home.
But first, a couple of basics: Interest rates are determine how much money you are going to be charged by a lender to borrow the money you need to buy your home. Money isn’t free. All banks and institutions charge interest for lending you money. A mortgage is no different.
What Determines Interest Rates?
Interest rates are determined by a number of factors. They include your credit score, where your home is located, the type of loan you’re getting and the term the loan is for. For example, you can get a 30 year fixed interest rate loan (most common) or you can get a 5/1 adjustable interest rate loan (adjustable rate loans is what got us into trouble during the housing crash). Each of these loans carries a different interest rate.
In general, the lower the interest rate, the better the situation for most home sellers and buyers. However, right now interest rates are going up, and you need to move before they get much higher.
How Interest Rates Affect Buyers
This one is pretty simple to understand: the lower the interest rate, the less money you will have to pay back to your lender for giving you the money to buy your house.
This will also affect your monthly payments . . . sometimes by hundreds of dollars a month. It is also the case that the lower the interest rate, the more money you will be able to borrow and that means you can get a nicer house. As interest rates rise, the less money you will be lent. This is because lenders base the money they will let you borrow on your ability to pay it back. The more money you owe in interest (which makes for a higher monthly payment), the less money you will be able to borrow.
While the interest rates are so low, it will allow you to buy a bigger, better home and owe less money in the long run in order for you to buy it.
How Interest Rates Affect Sellers
If you’re selling your home, you may think that you don’t need to worry about interest rates. After all, you’re getting money, not borrowing it right? Well, this is true if for some reason when you sell your current home, you don’t need to buy a new one, but let’s focus on the here and now of what it does to your property value to have higher interest rates.
Above we just told buyers that the lower their interest rates are, the more money they will be able to borrow. That’s something that you as a seller really needs to appreciate. If buyers are out there and they have the ability to borrow higher amounts of money, then there is more money out there that can be used to buy your home.
Another way to look at it is this: If there is a buyer who can afford to buy your home at 3.5% interest rates, that same buyer may not be able to afford your home at a 4.5% interest rate. Everything else can stay exactly the same (their income, job status, credit score, down payment, etc.), but that “small” change in interest rates can make it impossible for that buyer to purchase your home.
If it happens to one person, it happens to others and the value of your home will go down if there aren’t enough people out there who can afford to buy your home.
So if you’ve been considering selling your home, now may be the best time to do so before the buyers out there start to lose some of their buying power.
We know this can get confusing and there is a lot to take in. If you’d like to discuss how interest rates will affect you personally, please contact us!