The Federal Reserve has raised its benchmark interest rate seven times, with the last vote putting the rate at a range of 4.25% to 4.50%. You have probably read or watched news coverage about recent rate hikes, which are increasing at one of the fastest paces in modern history. This can be good or bad news, depending on how you were planning on spending your money in the next few years.
If you already own a home and are planning on saving money in excess of your expenses, then you may finally start earning a decent interest rate on saved money in the bank. Unfortunately, if you did not own a home already, and were planning on buying soon, you will likely be getting hurt by recent hikes.
Higher interest rates impact your payment on borrowing costs. As a consumer, when you borrow money, you will now be paying a higher amount than when interest rates were low. Unfortunately, this applies to mortgages too. Mortgage rates and home equity lines of credit are at their highest rates in the 2000s.
Simply put, if you were planning to borrow money to buy a home, it will be more expensive now than it was a year ago. This affects the housing market across the country, for both buyers and sellers.
What Do Rate Hikes Mean for Hampton Roads Buyers?
At the base level, it means you will be paying more each month for a home than you would have before rates went up. Here are some of the initial struggles with higher interest rates when trying to get approved for a mortgage:
- Higher rates of monthly payments
- Lack of affordable buying options
- Inability to get approved for a home loan
Mortgage rates are impacted by the overall economy, like other financial instruments. Rates go up if the long-term outlook of the economy is strong; rates go down when the long-term forecast is less strong. Banks receive rate sheets every day, so change in rates is a constant.
Basically, if the economy is performing well, borrowers can afford more. This leads to an increase in mortgage rates. When the economy is not performing well, interest rates, and mortgage rates, fall to make it more affordable for borrowers.
Further, you will also have to decide between a 15 vs. 30-year mortgage. You will receive a lower rate on a 15-year mortgage, as borrowers will reward you for paying back the money in half the time.
What Impacts Mortgage Rates?
There are both personal and market factors that affect the mortgage rate you can secure when buying a home. Here are some of the financial factors or institutions that will influence the mortgage rate you lock in:
- The Federal Reserve’s benchmark interest rate
- Mortgage-backed securities or mortgage bonds
- Secured Overnight Financing Rate
- Constant Maturity Treasury Rate
- Overall state of the national economy
You are not totally stuck to the factors outside of your control, though. When applying for a mortgage, there are personal financial factors that banks look at to see if you would be a safe borrower for them to lend to. Some of the personal financial factors that will help determine the best mortgage rate possible are:
- Credit score (high means your low-risk; low means your high-risk)
- What amount of cash you are contributing to the down payment
- Loan-to-value ratio, which looks to see how much of your own money you have put in
- Occupancy (Is it your primary residence or do you plan on renting it?)
- Banking, loan repayment, and credit history
The bottom line is that no one factor dictates your mortgage rate. Instead, it is a confluence of factors. Some of these factors you can control, others you can’t.
As far as what you can control, be sure to be aware of your current credit score and work it up if you feel it will be a hindrance. You will also want to make sure that you have plenty of cash saved up for a down payment on the home. Not only will the bank evaluate the amount you put down, but it also counts towards your loan-to-value ratio. This number will show lenders that you are serious about the asset you are borrowing money to buy.
What Do Higher Rates Mean for Hampton Roads Sellers?
Sometimes it is easy to forget that mortgage rates have an impact on both sides of the housing market, not just buyers. Unfortunately for sellers, this is not a good thing as rates increase.
The reality is that the market for sellers looks very different from the market a year ago, where homes were being purchased above asking price, sight unseen, and waiving home inspections for good measure. Instead, you will see less price growth, as the asset is not as hot as it was a year ago. You will not be able to list your home for an exorbitant amount and still expect it to sell.
Fortunately, it is not all bad news. You will still get a fair price on your home from a qualified buyer; however, it will not be an astronomical figure. This means that you will not be spending an obscene amount of cash to buy a new place, though. These trends apply to you as a buyer, too!
Further, since the market has come back down to earth, you may be dealing with even more demand! There are a number of potential buyers who evaluated the red-hot market and decided to wait until prices were more reasonable. While it may not fetch you a massive figure, it does mean that your house could still sell quickly and without much sweat.
If you have any questions about the Hampton Roads’ market, as either a buyer or a seller, do not hesitate to contact the team at ProActive Real Estate Services. The team has decades of experience buying and selling homes in Hampton Roads, and would be thrilled to work with you.