Interest rates have been on the rise since early this year, and prospective homeowners have been feeling the strain. As a result of the increase in interest rates, some people have been reevaluating their decision as to whether they want to purchase real estate or not. But how is it that interest rates can affect your real estate transaction, and what should you do?
What Are Interest Rates?
In simple terms, the interest rate on a loan is the additional amount (represented by a percentage) that a borrower must pay every time they make a payment on their loan. Effectively, this represents the “cost” of borrowing the money from the lender, as the interest on the loan is the profit the lender makes from the money. As a general rule, the interest rate for a loan is set at the time the money is lent to the borrower, but in some cases (such as adjustable-rate mortgages) the interest rate can change afterwards.
What Affects Interest Rates?
There are a variety of factors that go into determining the interest rate for a loan, including the rate of inflation, the amount of demand for credit compared to the overall money supply, and most directly, the interest rate set by the Federal Reserve. “The Fed,” as it is known, sets the interest rate at which financial institutions borrow from one another, effectively setting the baseline interest rate for all loans, including mortgages. The higher the Fed sets its baseline interest rate, the higher all other interest rates get in turn.
How Do Interest Rates Affect Your Transaction?
In effect, the higher interest rates are, the more expensive it becomes to take out a mortgage to buy real estate. Even a relatively small increase in interest rates can amount to thousands or tens of thousands of dollars in additional payments you must make on your loan. In some cases, the interest on a mortgage can push an otherwise affordable house out of your price range, preventing you from purchasing the property.
What Can You Do About This?
There are some ways to potentially get more favorable interest rates on your mortgage, at least in the short term. For example, lenders tend to offer better loans with lower interest rates to people with better credit scores. Adjustable-rate mortgages often start with lower interest rates than the more common fixed-rate mortgages, for example, but their interest rates can rise much higher over time. You should also consider shopping around between different lenders, as some mortgage lenders might offer you better rates than others.
