Interest Rates and the Housing Market: A Guide for First-Time Homebuyers

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Buying a new home is an exciting adventure. If you’re a first-time homebuyer, it can also come with a bit of confusion. With news headlines focusing on fluctuating interest rates and changing market dynamics, it can be hard to understand whether it’s actually a good time to buy a home or if you’re better off waiting on the sidelines.

Understanding the basics of how interest rates work, how changes affect the overall housing market, and the potential impacts for you as a homebuyer can help you make decisions with confidence. Here’s what you need to know.

Interest Rates: The Basics

The U.S. Federal Reserve, also commonly known as “The Fed,” is the primary entity responsible for controlling interest rates in the United States. As the country’s central bank, the Fed decides on a benchmark interest rate, also called the Federal Funds Rate or the “bank rate.” This is the rate banks use to lend money to each other overnight.

When the bank rate changes, it creates a domino effect. An increase in the bank rate makes it more expensive for banks to borrow money. To offset this extra expense, banks typically charge customers more for their loans, including home loans.

Factors Influencing Your Personal Interest Rate

While the Federal Reserve plays a significant role in establishing the base interest rate, it doesn’t tell the whole story. When you apply for a mortgage, you’re offered a rate that is specifically tailored to you. There are several factors that may cause your personal interest rate to vary from the base rate. Understanding the specifics may help you secure the best possible deal. 

Credit Score

Your credit score is a reflection of how responsible you’ve been with your credit in the past. A higher score is a signal to lenders that you’re a trustworthy borrower, leading to lower interest rates. Lower scores may result in higher interest rates, as lenders attempt to offset what they see as a higher risk of lending money to people with lower credit ratings. 

Debt-to-Income Ratio

Prior to offering a loan, lenders want to know that you can comfortably afford the payments. As part of the assessment process, the bank will review your debt-to-income ratio. This is essentially a comparison of your monthly debt payments to your monthly income. A lower ratio helps show that you’re not over-extended, which can make you a more favorable borrower and lower your personal interest rate.

Loan Type and Term

Your rate can vary depending on the type of loan and the loan term. For example, a 15-year fixed-rate mortgage often has a lower interest rate than a 30-year mortgage, but the monthly payments are higher. Adjustable-rate mortgages might start with lower rates, but they can fluctuate over time.

Down Payment

The amount you can pay upfront for your home influences your interest rate. A larger down payment reduces the lender’s risk since you’re taking a smaller loan relative to the home’s value. Typically, if you can put down 20% or more, you may receive a more favorable mortgage rate.

The Impact of Interest Rates on the Housing Market

As a potential homebuyer, it’s critical to understand the relationship between interest rates and the housing market. Even slight interest rate shifts can cause a ripple effect through the housing sector, impacting everything from home prices to the number of properties listed for sale.

One major concern is that interest rate fluctuations can immediately alter a buyer’s purchasing power. When rates go up, potential buyers face higher monthly mortgage payments. This can cool demand, leading to slower sales. In some cases, rising interest rates can also stabilize or reduce home prices.

For example, in the first week of October 2023, the national average 30-year mortgage rate climbed to 7.49%, a 23-year high. At the same time, existing home sales declined for the third consecutive month, decreasing by 0.7% across the United States.

However, the impact is not always linear. At this time, the housing market is still competitive for buyers. Many homeowners currently have low-interest-rate mortgages and are unwilling to sell. This has caused demand to continue exceeding the available inventory.

What Does This Mean for Homebuyers?

Rising interest rates, low inventory, and other factors can create some challenges for homebuyers. With mortgage rates at 23-year highs, new monthly mortgage payments are hundreds or even thousands of dollars more than they were several years ago. 

This limits opportunities for buyers to enter the housing market and may require you to re-calculate what you can afford at these higher rates. The current decline in existing home sales is also a reflection of buyers taking their time, weighing their options, and potentially deciding to hold off on making a purchase.

While the cards may seem stacked against buyers right now, it’s not all bad news. Some homebuyers will be able to take advantage of opportunities that arise as a result of the current circumstances. For example, it’s important to keep in mind that sellers are also facing challenges.

With fewer buyers looking for homes, homeowners who need to sell in the near future may be highly motivated. This could lead to homes being priced more competitively, potentially offering buyers a better deal. Fewer buyers may also give you more room for negotiation. With less competition, you may be able to secure more favorable terms or additional concessions from sellers.

Also, while mortgage interest rates are at highs right now, they likely won’t stay that way forever. Many economists predict that the Fed will begin cutting interest rates in 2024. This means that buyers could potentially purchase a competitively priced home now and refinance to a lower-rate mortgage in the future.

How Keller Home Loans Can Help

At Keller Home Loans, we’re here to support home buyers through each step of the journey. We offer tailored advice to help you find the solutions that meet your needs.

Our experts can help simplify the complexities of fluctuating interest rates and the housing market, so you can make informed decisions. Contact us today to start confidently navigating your path to home ownership.

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