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  • Writer's pictureZachary Epps

How Raising Interest Rates Affect Home Prices

Many people buy homes on mortgages. If you have the right credit scores, you can qualify for various special mortgage programs that allow you to borrow more to cover the hosts either as upfront payments, or in installments.

If the seller's interest rates are high, you can expect to pay high prices. However, there is more than one factor at play here.

Raising interest rates can have a significant impact in determining the price of your home.

When you take a mortgage loan, you get either one of two types: adjustable or fixed rate.

Alternatively, you can get some features of each, combined in one.

Raising interest rates have an unprecedented effect on the prices of real estate assets. Here's how:

Reduced property appreciation

When interest rates go up, homes don't appreciate as quickly.

Historically speaking, interest rates and real estate prices aren't the only way to explain the phenomenon.

Since 1976, interest rates have been on the decline in the USA. The 1.5 percentage point mark has only been topped a few times in previous decades.

When the economy is strong and inflation levels are high, the prices of homes can rise.

The domino effect

As interest rates rise, so do the prices of homes. The purchasing merry-go-round causes a ripple effect that affects all other elements.

For example, after selling your home, a subsequent purchase of a new property will be more expensive. This is because the interest rate rises proportional to the prices.

Mortgage underwriting

Mortgage underwriters give homebuyers the approval to borrow a specific range of money that varies according to the property's value. The means used is by aggregating the loan-to-value and back-end ratios.

If interest rates go up, it means that borrowers have similar debt and income levels. In effect, most borrowers won't be able to get approval for larger interests.

The resulting effect in the market is a reduced pressure on property prices, as most homebuyers will be unable to afford them.

Mortgage type

Banks and other credit and lending institutions set interest rates for mortgages. The rates differ on various counts like dwelling use, length and mortgage terms

A dwelling's use could be either as an investment property or a primary residence. Interest rates also vary based on the length, while adjustable mortgages are more susceptible to rate increments.

As the federal reserve adjusts its rates annually, the impact on interest rates is more profound, and this indirectly affects the prices of homes.

The outcome

High interest rates alone don't determine the state of the real estate market. Several other factors contribute strongly to shifting interest rates. Most of them are indirectly linked.

They include factors like lending requirements, employment rate, wages. All of these elements combine to impact home buying activities and the maximum property price that they qualify for.

The combination of these factors impact media sale prices, which in turn affect interest rates.

Zachary Epps is an investment and real estate expert that can guide you through your home buying journey. Get started today!

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