How Rising Interest Rates Impact Home Prices

| February 13, 2017

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Fixed rate and adjustable rate are the two primary forms of mortgages. Additionally, multiple derivatives and hybrid combinations of each are available. You will be able to make mortgage decisions that make financial sense if you thoroughly understand interest rates and the economic factors that determine their future course. A financially sensible mortgage decision is choosing the appropriate interest rate type for your-self. In addition to understanding interest rates and the economic factors that determine their future course, you need to study the impact of rising interest rates on home prices.

Since they massively influence an individual’s ability to buy a home, interest rates are seen by many as the sole factor determining the value of a real estate. The reality is different though: there are many things other than interest rates that influence property values. Nonetheless, as interest rates have a significant influence on the value of a property, you need to learn about property investment and understand the impact of rising interest rates on home prices. Today, mortgage interest rates are constantly rising and this pattern is expected to continue for the next two years.

To find out the impact of rising interest rates on home prices, let’s consider an example. Let’s suppose, you get a $300,000, 20-year mortgage at 2.5% interest rate. Now, to pay off the mortgage, you should be incurring $1281 each month but even a one percent increase in the mortgage rate would increase your monthly mortgage payment. The higher rates will result in reduced purchasing power. Now, there are two possibilities. The first one is that the prices of the homes drop significantly due to factors other than the interest rates to allow you to afford the home at the increased interest rate. The other and more likely possibility is that the higher interest rate forces you to either pay more on your mortgage or look for cheaper alternatives.

If as a buyer, you choose to do the latter, you may not be able to find a suitable house for yourself. On the other hand, if you decide to pay more on your mortgage, there is a good chance that you won’t be able to break even or make a profit on home sale when your mortgage finally matures and you’re able to sell the house. This is a very tricky situation to be in. The best way to counter the impact of rising mortgage rates is keeping track of the economy. It is a well-known fact that economic factors have an impact on interest rates.

Usually, when an economy is flourishing, interest rates tend to rise. On the other hand, interest rates take a downturn when the economy is hit by debt or other detrimental factors.

Before you mortgage a house, you find out the economic conditions of the state or the country the house is located in. Get in touch with us if you want to know more about the economic factors to keep track of and the impact of rising interest rates on home prices.

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