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How Rising Interest Rates Will Impact Your Home Purchase in California

How Rising Interest Rates Will Impact Your Home Purchase in California

After reaching historic lows just a year or so ago, mortgage interest rates are now rising. In fact, rates for 30-year fixed-rate mortgages are now the highest they’ve been since May of last year. Traditionally, rising rates have meant less buying power for home buyers/borrowers. But we have some unique circumstances this time around. Let’s see, then, how rising interest rates will impact your home purchase in Riverside.

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 likely know already, “is the amount charged on top of the principal by a lender to a borrower for the use of assets.” And several factors go into determining exactly what the rate is. One of the chief factors is the current state of the economy. The other is what the country’s central bank does.

“A country’s central bank sets the interest rate, which each bank uses to determine the range of annual percentage rates (APRs) they offer.” Our central bank is Federal Reserve System, the Fed, which lowered rates significantly largely in response to the COVID crisis. But now conditions are changing and rates are rising.

Traditionally, when the Fed “sets interest rates at a high [or higher] level, the cost of debt rises. When the cost of debt is high, it discourages people from borrowing and slows consumer demand. In addition, interest rates tend to rise with inflation.” These are two conditions that obtain now.

But what do these rising rates actually mean for your home purchase in Riverside?

How Rising Interest Rates Impact Real Estate

Rising interest rates and buyers’ ability to purchase homes are intimately tied together. When rates rise buyers are typically less well-positioned to buy homes (and, conversely, when rates go down, their purchasing power increases). Here’s what this means in actual practice . . . 

“If interest rates rise 1% and all other economic factors remain the same, purchasing power for homebuyers will decrease by just over 11%. Therefore, every quarter-percent (.25%) rise of interest rates reduces homebuyer purchasing power by about 3%. That means for a home purchase of $300,000, a 1% interest rate rise reduces buying power to just under $267,000.”

This phenomenon can mean a smaller pool of buyers and less competition. But it can also result in a rash of buyers trying to purchase a home before rates go even higher, which means increased competition. 

And it also varies between local markets. Be sure, then, to contact, a Riverside agent at (866) 593 7012 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 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 . . . 

If, for example, “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%. So, what does this mean for homebuyers?

“From a home buyer’s perspective, as mortgage rates increase, affordability decreases. In the aforementioned, 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.”

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

First, the rising interest rates will most likely result in decreased buyer competition. And this comes on the heels of “one of the hottest and most competitive housing markets in history, and it was largely driven by record-setting low mortgage rates.”

According to industry experts “you can expect some of that competition to wane. Buyers will pull back slightly as higher rates make homes less affordable, and there should be fewer bidding wars for those still on the market. This could also help buyers avoid some of the more risky tactics they were forced into last year – things like waived inspections or appraisal contingencies.”

Slowed Price Increases

In recent years, growth in the price of homes has been “astronomical”: “the national median price jumped 19.2% between July 2020 and July 2021 alone.” But owing in part to rising interest rates, that is changing, and “it’s likely that price growth will start to taper off as we get further into 2022.”

In fact, “Freddie Mac forecasts home prices will rise just 2% for most of this year (even less toward the end), while property data firm CoreLogic predicts about a 6% increase. Both are miles more manageable than the skyrocketing prices we’ve seen recently.”

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 benefits, when rates rise, buyers need to shop more wisely. And that’s why the services of an experienced, local Riverside agent are more important than ever. So if you’re concerned about how rising interest rates will impact your home purchase in Riverside, don’t hesitate to contact us today at (866) 593 7012.

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