What Do Rising Interest Rates Mean for Buyers and Sellers?

It’s no secret that inflation is happening in just about every section of the United States. You probably see it in the news and feel the effects on your wallet. As a result of inflation, the Federal Reserve has started raising short-term interest rates. This greatly affects both the buyer and the seller when it comes to homes and the real estate market.

Why Are Interest Rates Rising?

Put simply, interest rates are rising because the Federal Reserve is trying to stabilize prices. Interest rates are also forced to rise because of things happening around the world including the COVID-19 pandemic, the sanctions on Russia, and the war in Ukraine. Rising interest rates will continue until some of these issues stop.

As a result, the US central bank is forced to try and curb inflation. Even if there is a slight increase such as a percentage point or less, the effects of borrowing can be felt by buyers. This is especially true if you are trying to borrow a large loan.

Effects Felt By Buyers

The rates set by the Federal Reserve directly correlate to current mortgage rates. So, rising interest rates in the central bank mean rising rates for all people trying to secure a mortgage. This can have several effects and might make borrowing as a future homeowner much more difficult.

Higher Mortgage Payments

Any time you have a higher interest rate, you’ll have a higher mortgage payment. Every month, you need to expect to pay a large monthly payment. This means you need to find a way to increase your budget.

Difficulty Finding the Right Home in Your Price Range

Every homebuyer has a price or range of prices in mind before looking for properties. When there is inflation and rising interest rates, this task becomes much harder. Sellers need to raise prices to cope with the high-interest rates.

You might need to wait for interest rates to drop before you can find a home that fits your budget if it does not have any wiggle room.

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You Can Only Secure a Lower Loan Amount

When looking for a mortgage, lenders base the amount you can get on your debt-to-income ratio and your credit score. Your loan amount is also affected by the down payment you can provide and the monthly payment you can afford.

Rising interest rates mean you will see yourself approved for smaller loans. This in turn affects the home you’re able to buy. While it affects all buyers, first-time buyers will see the most negative effects. If you cannot afford to put down a higher down payment, you’re stuck with the small loan offers given to you.

You Might Be Stuck Renting

With rising interest rates and not enough homes on the market, you could be stuck renting a home until the market conditions are more stable for buying and getting a better loan amount. This is not true for all areas though.

The cost of renting can increase faster than buying depending on where you live. Before choosing whether to buy or rent it’s worth meeting with a real estate agent or doing some research on your own.

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Effects Felt By Sellers

Buyers are not the only ones that can see a big difference when it comes to a rising interest rate. Many sellers think now is the time to try and sell since the average price of homes has drastically increased.

Before selling though, consider these negative effects:

Your Home May Sell For a Low Value

Houses are selling for high prices now, but this might not last forever. Since many buyers are not qualifying for needed loan amounts, your house could sit on the market for much longer than normal. Once the housing market crashes and interest rates lower, you might get stuck selling your home for a much lower amount than anticipated.

You Will Have a Hard Time Finding a New Home

Keep in mind if you are selling during this time, you also have to buy at high-interest rates unless you already have another residence you plan to stay at full-time. There are also fewer options on the market so you might not find a home you absolutely love and you’ll be forced to settle on a new place.

Fewer Interested Buyers

As interest rates rise, there will be fewer buyers who are looking to buy in the current market. You might have a very hard time selling your home or you could not be able to sell it all. Not sure if you should rent or buy? Check out this article to learn more about the pros and cons of buying vs renting.

How to Profit From Rising Interest Rates?

Luckily, there are some ways you can benefit from rising interest rates. One of the best ways is to get a new savings to account with a higher interest rate. You can also invest in bonds since bond prices decrease as interest rates rise.

What Assets Do Well With Rising Interest Rates?

Some of the best assets for rising interest rates include:

• Value stocks
• Dividend stocks
• Short-term government bonds
• High-yield savings accounts

What Do Rising Interest Rates Mean?

Rising interest rates mean that any kind of loan or borrowing will be affected by high-interest rates. It also means it’s a less-than-ideal time for borrowing since your monthly payments will be much higher than in times of low-interest rates.

Are Interest Rates Rising?

Yes. The Federal Reserve is currently raising interest rates to try and curb inflation. Various world events like the COVID-19 pandemic and the war in Ukraine are causing a sharp rise in interest rates that are drastically affecting American people, especially those that are trying to secure a mortgage to buy a home.

Final Thoughts

As both a buyer and a seller, there will be dramatic effects for homebuyers and sellers. Buyers will find it harder to secure the right size loan, while sellers will find it very difficult to sell their home quickly since buyers are not able to secure the funding they need.