How do interest rates impact mortgages?

On Behalf of | Oct 11, 2022 | Real Estate Transactions | 0 comments

Mortgages are big business for lenders. They make a lot of money on these loans by charging fees and interest.

The government, particularly the Federal Reserve, controls interest rates. They can raise or lower it depending on the economy. When they want to slow down growth to prevent inflation, they will raise the rate. When the economy is moving smoothly, they lower it. There are more complex details involved, but that gives you a general idea. When rates go up, it has a serious impact on the real estate market and mortgage lending.

Money is worth less

As a buyer, your money is worth less when interest rates are higher because your cost to buy a property will be higher. Your mortgage lender looks at your ability to pay for real estate over the long term, which means they consider the interest rate. A high rate will add hundreds of thousands to your mortgage in most cases, which means you can afford less to spend on the actual property.

Payments get higher

Another factor is that with a high-interest rate, your monthly payment will be higher because your balance is higher. An increase in the interest rate on a variable loan could jump your payment by quite a bit each month. Even with a fixed-rate loan, you will end up paying more per month than if the rates were lower.

Sellers lose out

Sellers also lose out. To keep their properties affordable, they have to lower their asking costs. This means they could lose thousands or more on selling their real estate simply because the buyers will be shelling out more for interest payments.

The interest rate is very important in real estate. It can make or break a deal.