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  • Writer's pictureMichael Manley, CRP, IFA

Here's How Rising Interest Rates Affect Homeowners and Potential Buyers

Interest rates have a significant impact on the housing market as they play a crucial role in determining the cost of buying, selling, or refinancing a home. When interest rates rise, they have a direct impact on the way consumers finance purchases, and this can impact the residential real estate market in remarkable ways.


The Federal Reserve has kept interest rates low for a long time, which fueled a record housing boom following the Great Recession. However, economic recovery has spurred the Fed's decision to raise interest rates, which started in December of 2015. The Federal Reserve raises rates to control inflation and to stabilize economic growth, but the spike in interest rates has a profound effect on homeowners and potential buyers.


For homeowners who borrowed when rates were lower, rising interest rates can decrease the value of their homes. This happens because when loan rates increase, it affects payments and the amount of interest being paid on mortgages. Homeowners with adjustable-rate mortgages (ARMs) can also see their monthly payments rise, which ultimately affects their bottom-line. Additionally, if homeowners need to refinance their mortgages, they'll have to pay higher fees for doing so, or possibly face being denied refinancing altogether, which can limit options for homeowners.

Higher interest rates also make purchasing a home more expensive for potential buyers. For first-time homebuyers, this can affect their ability to enter the housing market, as they may not qualify or afford as much house, which in turn will likely lead to fewer home sales. Consequently, for would-be sellers, the market will become more competitive, and houses might stay on the market for a longer time.


When interest rates rise, demand for homes decreases, which ultimately causes property prices to decline. When this happens, buyers can benefit from an affordable housing market, but those who purchased a home at a higher rate may find themselves underwater or be faced with the prospect of having to sell the property for less than what they paid.


In a rising interest rate environment, buyers may need to adjust their expectations to stay within their budget. This may mean settling for smaller or cheaper homes or delaying the purchase altogether to wait for rates to stabilize. On the other hand, homeowners may need to refinance their mortgages or work with their lender on modification programs to avoid foreclosure.


In conclusion, rising interest rates have a ripple effect on the U.S. real estate market. For homeowners, the rise in interest can cause their home value to decrease, while potential buyers may have to settle for less, or delay homeownership altogether. Regardless, the best solution is to consult with experts in the residential real estate market for guidance on how to navigate the market in a rising interest rate environment.

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