Interest rates are changing – that is, they are rising – and that’s going to affect what homebuyers can afford. With the current low inventory and rising home prices, it’s just another blow for buyers. Interest rates are steadily rising, slowly at first and now at an increasing rate, from the historic lows they hit just a short time ago. While no one can accurately predict what the rates will do in the future, the consensus is that the days of sub-3% rates are now gone and not likely to return. Let’s take a closer look, then, at how changing interest rates change which homes you can afford in Shoreline.
Interest Rates and State of the Market
With the impact of COVID-19 and measures taken to slow the spread, mortgage interest rates tumbled. In fact, these interest rates “set 17 different record lows between March 2020 and January 2021.” And this resulted in what could only be termed a “home-buying frenzy.”
With these exceptionally low rates, buyers simply had more buying power, and they got busy buying to take advantage of the opportunity. The result was “a severe shortage of homes available for sale. In turn, the lack of inventory has sent home prices skyrocketing.”
The median home price in February 2020 was $270,000, but by February of 2021, it had risen to $313,000, about a 16% increase. Still, the rising prices were largely offset by the low mortgage rates. But now that rates are rising, buyers are feeling the impact of rising prices and decreasing affordability.
So buyer behavior is changing. In addition to the rising rates, many homes are now selling for more than the asking price. Many buyers, then, are searching in a lower price range.
What Changing Interest Rates Mean for Buyers
That’s a general overview of the changing interest rates and the current state of the market. But what does this mean specifically for you as a Shoreline homebuyer?
Conventional wisdom has it that rising interest rates make buying more difficult. Here’s an illustrative example:
“[I]f Johnny Home Buyer wants a 4% rate on a 30-year fixed mortgage on a home worth $400,000, his monthly mortgage payment would be $1,900.But if Johnny only qualified for a 5% rate on a 30-year fixed mortgage, his monthly payment would rise to $2,138. A 1% increase in interest raises Johnny’s payment by $238, or roughly 13%.”
Obviously, then, “as mortgage rates increase, affordability decreases,” and that will certainly change which homes you can afford in Shoreline. So, referring to the example above, suppose “Johnny Home Buyer wants to qualify for a $400,000 mortgage at 4% interest, but at 5% interest, lenders can only offer Johnny a $355,000 loan based on his qualifications. A 1% increase in mortgage interest decreases Johnny’s purchasing power by $45,000.”
So here’s what you need to keep in mind concerning the changing mortgage interest rates…
“Rising interest rates will have a serious effect on buyers. Those who were lucky enough to buy a home with a 3 percent interest rate were able to afford much more than they would have been able to pre-crash when interest rates were a more typical 7 percent or more.”
So what should you do?
This doesn’t mean you should hurry up and buy a home before rates go any higher. A fraction of a percentage point in interest can hugely impact which homes your can afford, but, still, this is only one of the factors you need to consider.
Yes, you should keep an eye on the interest rates, but you can, at the same time, work on other things that will get you better rates. One of these is your credit score. A sterling credit score will go a long way toward helping you get a lower rate on your mortgage. Also, work on lowering your debt-to-income (DTI) ratio. A lower DTI ratio will allow you to afford a larger mortgage and more home even with rising prices and rates.
So, although changing rates and rising prices have decreased affordability, you have other options to increase your buying power.
Interest Rates and the Importance of an Agent
One powerful way to increase your buying power is also very simple – and that is to get a better deal on the home you want to purchase. Getting more for your money is almost the same as having more money. And this is where your Shoreline agent can be an invaluable asset. Your local agent will know the local market inside and out and where and how to find the best deals. She will also have those absolutely critical negotiating skills that can get you a better deal. The changing rates don’t have to stop you from getting the home you want. Instead of fearing how rising interest rates will change which [market-city] homes you can afford, contact us today at (206) 578-3438.