Interest rates are the driving force behind shaping the housing market. Most homebuyers take out a mortgage, and interest rates directly affect how much a homebuyer will pay for their mortgage each month. In turn, this ultimately impacts how willing people are to buy a home. Even small changes in interest rates can be the difference between whether or not you can afford your monthly payment, which is why it’s vital to understand and keep an eye on trends in interest rates. 

What Are Interest Rates?

In short, interest rates are the fee you pay the bank for lending you money. In real estate, an interest rate is the percentage of the loan that the homebuyer pays the lender as the cost for borrowing the money to buy a property. There are two primary types of interest rates in real estate: fixed rates and adjustable rates. Fixed rates are unchanging for the entire term of the loan, while adjustable rates can change periodically based on market conditions. 

How Do They Impact Homebuyers?

Interest rates have an inverse relationship with the housing market. With higher interest rates comes lower demand to buy houses, and with lower interest rates comes higher demand to buy houses. This happens because interest rates affect mortgage costs. When interest rates are low, monthly mortgage payments are more affordable, increasing demand, boosting prices, and stimulating buying. When interest rates are high, mortgage payments become less affordable, which decreases demand, slows the housing market, and decreases property value. 

Factors That Affect Interest Rates

Although there are many factors that impact interest rates, a few key ones are particularly important to consider as a homebuyer. 

Macroeconomic Factors:

• Inflation: As prices continually increase, the value of money paid back in the future decreases. Lenders will charge higher interest rates to ensure they’re not losing money.
• Economic Growth: In a strong economy, demand for loans and borrowing increases, leading to higher interest rates.

Individual Loan Factors: 

• Credit Score: A higher credit score typically means the borrower has a history of responsible debt management, which means the lender will give a lower interest rate. 
• Loan Type: Short-term mortgages generally have lower interest rates. 

Conclusion

Interest rates may seem like another financial term, or even come off as intimidating. However, they play a very important role in shaping your journey as a homebuyer. By being educated on the importance of interest rates and how they impact homebuyers, you’ll be able to make smarter, more informed decisions.