Mortgage interest rates are already climbing after reaching historic lows only a year or so ago. In fact, 30-year fixed-rate mortgage rates have reached their highest level since May of last year. Rising rates have always meant reduced purchasing power for property purchasers and borrowers. This time, though, we have some unusual conditions. Let’s take a look at how rising interest rates will affect your San Bernardino, CA house purchase.
How Interest Rates Are Determined
Have you ever wondered what causes rising interest rates and how interest rates are determined or set?
“The interest rate,” as you probably already know, “is the amount charged by a lender to a borrower for the use of assets on top of the principal.” And there are various criteria that go into establishing the pricing. The current situation of the economy is one of the most important aspects. The other is what the central bank of the country does.
“The interest rate established by a country’s central bank is used by each bank to define the range of annual percentage rates (APRs) it offers.” The Federal Reserve System, or Fed, is our central bank, and it has dramatically decreased interest rates in reaction to the COVID problem. However, times are changing, and interest rates are rising.
The cost of debt typically rises when the Fed “sets interest rates at a high [or higher] level.” When debt costs are high, people are less likely to borrow, which lowers consumer demand. Furthermore, interest rates tend to rise in tandem with inflation.” These are the two circumstances that exist right now.
But what do these rising rates actually mean for your home purchase in Moreno Valley, CA?
How Rising Interest Rates Impact Real Estate
The capacity of purchasers to acquire a home is inextricably linked to rising interest rates. Buyers are often less well-positioned to buy homes when interest rates rise (and, conversely, when rates go down, their purchasing power increases). The following is an example of what this entails in practise…
“If borrowing rates climb 1% and all other economic conditions remain unchanged, homebuyers’ purchasing power will fall by little over 11%. As a result, every quarter-percentage-point (.25%) increase in interest rates diminishes homebuyer purchasing power by around 3%. A 1% increase in interest rates reduces the purchasing power of a $300,000 property to slightly about $267,000.”
This could result in a narrower pool of buyers and less competition. However, it may result in a rush of purchasers attempting to acquire a home before rates rise even further, resulting in increased competition.
And it also varies between local markets. Be sure, then, to contact, a Fontana, CA agent at 951-476-3231 to find out exactly what’s going on in your market.
An Illustrative Example
“[C]onventional wisdom says that rising interest rates make buying or selling a home in San Bernardino, CA more difficult, and decreasing interest rates make buying and selling easier.” So let’s look at an illustrative example to see how this plays out . . .
For example, if “Johnny Home Buyer” wanted a 4% rate on a $400,000 home with a 30-year fixed mortgage, his monthly mortgage payment would be $1,900. Johnny’s monthly payment would jump to $2,138 if he only qualified for a 5% rate on a 30-year fixed mortgage. Johnny’s payment will increase by $238, or nearly 13%, if interest rates rise by 1%. So, what does this imply for prospective homebuyers?
“Affordability falls as mortgage rates rise, from the standpoint of a property buyer. Johnny Home Buyer, for example, wants to qualify for a $400,000 mortgage at 4% interest, but lenders may only offer him a $355,000 loan at 5% rate based on his qualifications. Johnny’s purchasing power is reduced by $45,000 for every 1% increase in mortgage interest.”
That sounds like pretty bad news for buyers, but the current rising rates carry some surprising benefits as well.
Surprising Benefits for Home Buyers
Less Buyer Competition
For starters, rising borrowing rates will almost certainly reduce buyer competition. This comes after “one of the hottest and most competitive housing markets in history,” which was fueled in part by “record-breaking low mortgage rates.”
“You can expect some of that competition to wane,” industry analysts say. As higher rates make properties less affordable, buyers will draw back significantly, and there should be fewer bidding battles for those left on the market. This may also assist purchasers avoid some of the riskier practises they were obliged to use last year, such as waived inspections and appraisal contingencies.”
Slowed Price Increases
Home price growth has been “astronomical” in recent years: “the national median price jumped 19.2 percent between July 2020 and July 2021 alone.” However, this is changing, thanks in part to rising interest rates, and “it’s likely that price growth will start to slow off as we approach closer to 2022.”
In reality, “Freddie Mac estimates that home values will grow only 2% for the majority of the year (and even less toward the end),” whereas property data firm CoreLogic predicts a 6% gain. Both are significantly more manageable than the recent price spikes.”
It seems then that far slower price increases will offset the decreased buying power resulting from rising rates – good news for buyers.
Rising Rates Demand an Agent
Despite these potential advantages, purchasers must browse more carefully when interest rates climb. And it’s for this reason that the services of a knowledgeable Pat Buys Houses Cash agent are more crucial than ever. So don’t hesitate to call us at 951-476-3231 if you’re worried about how rising interest rates will affect your house purchase in San Bernardino, CA.