How Do Interest Rates Affect Your Home Purchasing Power? Top 5 Things to Know

In response to rising inflation, interest rates are expected to increase throughout 2023, resulting in a competitive seller’s market. Skyrocketing rates leave buyers in a challenging position when financing their homes. High-interest rates cause buyers to qualify for smaller loans, limiting their options to lower-priced neighborhoods. This may also drive buyers to rent instead if managing a mortgage seems impossible. Before diving into how high rates affect home purchasing power, here’s an overview of how lenders and the federal government determine rates.

There are many factors that lenders use to set an interest rate. Aspects like high inflation and economic conditions can cause mortgage rates to rise. Other factors depend on the buyer. For buyers to qualify for the lowest rates, lenders require high credit scores and low debt-to-income ratios. The price, location, and type of property also affect interest rates.

Federal Reserve rates also affect the range of mortgage rates available to buyers. The Federal Reserve sets the rate for banks borrowing from one another, effectively impacting all mortgage rates. Typically, Federal Reserve rates increase to counteract factors like inflation without severely affecting the economy. Homeowners with a fixed rate established before price hikes are unaffected by changing rates, but borrowers with adjustable-rate mortgages are heavily impacted.

Without a doubt, higher interest rates negatively impact purchasing power. Higher rates are even more influential than the effect of increasing home prices — an interest rate increase of 1% is equivalent to a price increase of 10%. In other words, when interest rates rise by 1%, a buyer purchasing a $1 million property would have to budget for $100,000 more.

The Fairfield County real estate market isn’t immune to such changes. According to the National Association of Realtors (NAR), the county’s monthly mortgage payment has increased over $1,000 from $1,752 last year to $2,802 today. Buyers applying for a 30-year fixed loan face average rates of 6.5%, while 15-year fixed loans are slightly lower at 5.875%. Even a half percent or quarter percent change can cost buyers thousands of dollars in the long term.

Buyers applying for mortgages also qualify for a lower amount in the presence of higher interest rates. Lenders determine mortgage amounts based on a buyer’s down payment and a determined monthly payment. Monthly payments are based on a borrower’s debt-to-income ratio. Monthly fees increase due to accrued interest, meaning buyers pay less for the loan’s principal amount and more for its interest fees.

Buyers can take a couple of steps when faced with this obstacle. One, they can adjust their search for Fairfield County homes for sale to include different properties or smaller homes. Two, they can wait to buy and work to save up a down payment, increase their credit score, and pay off debt. This gives buyers a better chance of qualifying for a better mortgage and increases their purchasing power. Buyers intent on home ownership always have the option to refinance later when rates are lower.

Less purchasing power often leads to less buyer demand in the housing market. This can be good for buyers working with a Fairfield County real estate agent. When there’s less buyer demand, sellers are forced to adjust their listing price, which gives buyers more leverage in their search. Although this change doesn’t happen immediately, less competition between buyers puts home searchers in an excellent position to negotiate with sellers.

On the other hand, higher mortgage rates also cause buyers to have fewer options. Buyers should remember that high-interest rates are much more potent than high home prices, as the amount accrued over the years can cost thousands of dollars. Buyers can find themselves in a severe bind when housing inventory is too low to meet buyer demand. If demand levels continue outpacing supply, high prices can linger.

In areas like Fairfield County, inventory has experienced virtually no growth and remains low at 1.9 months. Low supply and persisting buyer demand are reflected in the median sales price for single-family homes, which has increased significantly in the past year. Decreasing closed sales indicate the impact of high rates and low inventory. For updated information on market trends, always work with local professionals like those at Matt Rose Realty Group.

Those considering a renting alternative should weigh the pros and cons. With quickly appreciating home values, rental rates tend to rise faster than mortgage payments. This means that renting isn’t always the cheapest option. In cities like Fairfield, the average rent is about $2,000, with one-bedroom apartments averaging $2,135.

The monthly mortgage reported by NAR is still over $600 more than the higher range of rental rates in Fairfield. However, this figure is significantly impacted by local fluctuations and the type of rental properties buyers search for. For example, Fairfield County cities like Westport have an average rental rate between $2,295 and $3,995. In this case, it’s more cost-effective to opt for a mortgage.

Rising mortgage rates are a serious obstacle many buyers face in Fairfield County and across the United States. Not only do higher rates decrease purchasing power, but they also limit a buyer’s options. Renting as an alternative isn’t always the right choice, so buyers should research rates in the area before deciding. Finding a home that meets all your needs under constraining interest rates can be difficult without professional help. Contact experienced agent Matt Rose for expert guidance in finding the perfect home.