When it comes to real estate, it helps to understand the terminology being used. That’s true whether you’re buying or selling a house.
I work with clients all the time to help them understand interest rates and how they affect the home-buying process. My goal is to find the best financial fit for every buyer and every budget.
Basically, interest rates are the price you pay for using someone else’s money. Here’s how the folks at Investopedia put it: “Interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.”
With a home purchase, it works just like a car or college loan: You pay back the money you borrowed (your mortgage) from your lender with interest — which is a percentage of the principal amount you borrowed. So, interest rates have a direct impact on how much you pay every month for your home.
The Higher the Rate, the Bigger the Bill
You likely already understand that the higher the rate, the more it costs to borrow money. For a home loan — a mortgage — that means a higher total cost and higher monthly payments.
But what affects the interest rate? There are several factors, including the actions of the Federal Reserve and the overall health of the economy.
The Federal Reserve sets what is known as the Fed funds rate, which is the rate banks charge each other for lending money. That rate in turn has a number of economic effects, including the interest rate banks charge for lending money to businesses and individuals, including people who need a mortgage to buy a home.
Fed Raises Interest Rates
The Federal Reserve has already raised that rate twice this year, and it’s expected to do so again before the end of the year. The move indicates the economy is getting stronger and unemployment is getting lower. But inflation is ticking upward, so the concept is to slowly raise interest rates to keep the economy from overheating.
“The main takeaway is that the economy is doing very well,” Fed Chairman Jerome Powell said in June. “Most people who want to find jobs are finding them, and unemployment and inflation are low.”
But consumers should expect another three or four rounds of interest rate increases over the next 18 months, according to Lawrence Yun, chief economist for the National Association of Realtors.
“Mortgage rates will consequently continue to nudge higher,” Yun said. “Fortunately, the economy is strong and wages are rising. If housing supply can be increased through more home building, then the negative impact of rising interest rates can be mitigated.”
Understanding interest rates and how they affect your mortgage payment is essential when it comes to buying or selling a home. While interest rates are on the rise, it’s important to focus on the big picture — they’re still historically low and they reflect a strong overall economy.
There’s a lot to know when it comes to buying or selling a home, which is why it’s so important to have the right real estate agent on your side to guide you through the process. I’ve lived in Northern Virginia my entire adult life, so I understand this market. Contact me and we’ll talk about what you need. And don’t worry about pressure — there won’t be any.
Looking to buy or sell a home in Gainesville, Haymarket and Manassas? I’d love to partner with you on your next home buying and selling adventure.