Home prices saw record highs over the last year with most houses selling for much more than their market value. Buyers were willingly waiving appraisal contingencies and willing to pay the difference between the home’s value and the sales price.
Fast forward to today and things are slowing down. Yes, just as many homes are for sale, but the prices are coming down and not because there’s less buyer interest, but because interest rates are on the rise.
Here’s how home prices are affected by rising interest rates.
Some Buyers Won’t be able to Buy
Buyers who were on the cusp of approval may find themselves without a loan approval now. if your debt-to-income ratio was already near the maximum, you might not get the loan approval you need with higher interest rates.
Even if you can get the approval, you may not want to make such a large payment. You should choose a loan that you’re comfortable with and not feel stuck because rates increased.
Each time the interest rates increase 1%, you lose about 12% in purchasing power. If you don’t have the income to make up for the higher payment, you could find yourself without a loan.
There will be Less Demand
There are still plenty of buyers in the market, but not enough to cause the intense bidding wars we saw over the last year. A lack of bidding wars can keep prices down too. Because you don’t have people fighting over the home and increasing the price irrationally, the person that wins the bid will likely win it for the home’s actual value, not an inflated value.
New Home Builders are Seeing Cancellations
In what was a time of waiting lists a mile long, homebuilders are now making their way down the waiting list, trying to find someone to buy their homes.
With higher interest rates, many buyers have backed out because they can’t afford the higher payment. Take for example a $300,000 loan at 5%. You’ll pay $1,610 a month and $297,767 in interest. Now take that same loan at 6%. You’ll pay $1,798 a month and $347,514 in interest. That’s $49,747 more in interest over the loan’s term.
Buyers who were on the cusp of affording the loan might be backing out more often now because they can’t afford the higher interest payments.
If you’re worried about how the higher interest rates affect your ability to buy a home, let the professionals at Save Financial help. We work with many lenders that offer a variety of loans. We’ll help you find a loan that is affordable for you and helps you meet your financial obligations.
We know that the rising interest rate environment seems scary, especially after we just came off the lowest rates in decades, but we’re here to help. We’ll show you the options available that will fit your budget and help you buy your dream home without getting in over your head.