By Mikkie Mills
If you’re someone who keeps a lot of cash in long-term savings, the thought of an interest rate hike is thrilling; however, most other consumers greet the news with dread because it could mean they'll end up paying more for their existing loans.
For homeowners, interest rate increases are confusing. There’s little doubt that a higher interest rate will cost people more money if they are dealing with an adjustable-rate mortgage. When mortgage rates are low, which they have been for many years, borrowers tend to choose ARMs because they offer lower monthly payments. As long as the rates stay down, their payments will follow along; however, increases in interest rates can cause an increase in monthly payments.
For most American homebuyers, interest rates have been stable for years. The housing market has picked up substantially since the 2008 crisis, but some people are currently nervous because the Federal Reserve could be entering into a long-term interest rate raising trend.
Interest Rates Have a Significant Impact on Mortgage Loans
Higher interest rates make loan repayment tougher. Monthly payments are higher with a high-interest loan, leaving the homebuyer with less money to spend on their houses. Most homebuyers are willing to borrow using an ARM, especially if there's a long time before the interest rate may change again. Many people may figure that a seven-year window of opportunity is long enough to sell a house or renegotiate the loan if needed. And, if interest rates continue to stay near historic lows, these types of mortgage loans will remain extremely popular.
Home Sales Feel the Pinch When Rates Rise
Interest rates on mortgage loans play a direct role in influencing home sales. A smooth market with a lot of liquidity, easy-to-obtain loans, and many participants is healthy. If interest rates become onerous, fewer people want to borrow money, which eventually causes a slowdown in buyers and sellers. U.S. home sales have been cooling off recently, in large part because selling prices have been high.
A Market Slowdown Is Possible If Rates Remain High
Stable interest rates are best for the housing market. The more predictable the rates are, the more accurately companies can forecast their business projections. Businesses always love steady returns, so they’re more likely to lend and borrow when the outcome is easy to calculate.
Sharply rising interest rates can wreak havoc in the real estate market, as we saw during the 2008 meltdown. At the time, many low-doc loans existed, and, when interest rates rose and balloon payments came due, foreclosures went through the roof. The current mortgage industry has put some safeguards in place to ensure this doesn’t happen again. More qualified borrowers, in addition to well-structured mortgage loans and stable interest rates, are helping to maintain a robust market for buyers and sellers.
Currently, most Americans think it’s a better time to sell a home than to purchase one. This idea seems to be a direct response to the record-setting house prices in many markets. With houses priced near their all-time highs in multiple locations and the constant threat of rates rising, it’s worth using checkweigher or other services to stay ahead of the trends.
It seems likely that the Federal Reserve will not overdo the raising of rates. They've been very sensitive to increases as the economy continues to rebound from the global financial crisis; in fact, the rise in rates shows that the economy has become significantly stronger in the past few years. As the markets have firmed up and many lower-cost houses are now off the market, there will be less bargain-hunting and flipping in the next few years.
Mikkie Mills is a freelance writer and frequent contributor to RISMedia's Housecall blog.
This article is intended for informational purposes only and should not be construed as professional advice. The opinions expressed in this article are those of the author and do not necessarily reflect the position of RISMedia.
The rising rates are a must. In order to jump start an economy that isn’t doing well (unlike the current economy), one sure-fire method is to lower rates. At some point though, rates become too low and you can’t lower them any further without running the risk of negative interest rates that we’ve seen in some countries this past year. Yes, a rise in rates may price some buyers out, but it will also have the impact of getting those “on the fence” to make a purchase.
Actually, when fixed mortgage rates are low (as they have been) relatively few borrowers take ARMs. Black Knight Financial Services looked deeply at ARMs just a year ago (November 2016), and at the time, just 4 percent of new mortgage originations were for ARMs. Anecdotal evidence for 2017 suggests that ARM originations have picked up a bit but remain in the single digits in terms of origination.
Also, because the vast majority of ARMs being originated feature fixed-rate periods of five years or longer, a rising interest rate environment shouldn’t trouble homeowners for a number of years, if at all. Most ARMs today are made to jumbo borrowers, who (theoretically, at least) have a greater ability to withstand higher monthly payments that may accompany a rising interest rate climate.
Somewhat higher interest rates and mortgages are likely to be seen in the year ahead, but probably not enough to make a significant impact on home sales. Sales are being tempered right now by a lack of available supply relative to demand, but even if some demand is tempered by higher mortgage rates there should remain plenty of homebuyer demand to keep home sales rising for a good while yet, with fixed mortgage interest rates not likely to be much of a factor until they move past 5 percent.
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