On July 27, 2022, the Federal Reserve raised interest rates by 0.75 percentage points, taking its benchmark rate to a range of 2.25%-2.5%. While the fed funds rate most directly impacts what banks charge each other for short-term loans, it feeds into a multitude of consumer products such as adjustable mortgages, auto loans and credit cards. The increase takes the funds rate to its highest level since December 2018. 

Markets expect the Fed to raise rates at least another half percentage point in September. According to CME Group Data, Traders are expecting the central bank to go further and have rates increase another 0.75 percentage points or 75 basis points in September. 

What does all of this mean for homeowners? With regards to real estate, conventional wisdom says that rising interest rates make buying or selling a home more difficult. From a home buyer's perspective, as mortgage rates increase, affordability decreases. For example, Homebuyer Bob qualifies for a $400,000 home loan at a 4% interest rate. If that interest rate raises just 1% to 5 %, then lenders will only offer Homebuyer Bob a $355,000 loan based on the same qualifications. That 1% increase reduces Homebuyer Bob’s purchasing power by $45,000.00.

Here’s another example. Homeowner Owen’s monthly mortgage on a 30- year fixed rate loan on a $400,000 home at 4% would be $1900/ month. The same loan at 5% interest rate would bump his monthly mortgage payment up to $2138/ month. The 1% increase in interest is actually raising his monthly payment by 13%. When you are working with a strict budget, most people simply cannot afford a 13% increase in their monthly bills. 

How does increased rates affect home sellers? Rising interest rates negatively affect home sellers as well. Homeseller Sam wants to sell his home for $400,000.00. However, due to the 1% rising interest rate (from 4%-5%) potential buyers can now only afford to buy Bob’s home for $355,000 because that is all the bank will loan to them. That 1% interest rate increase essentially diminished the market value of Bob’s home by $45,000.00. 

When interest rates go up, mortgages become more expensive as the interest rate on mortgages also goes up. This makes it more costly for consumers to purchase a home. When homes are more expensive, the demand for them decreases. This results in sellers having to reduce the price of their homes in order to attract buyers. 

In summary, the Fed is not doing potential homebuyers or homeowners any favors by raising interest rates. Higher interest rates means buying a home will get more expensive, selling your home will be more difficult and refinancing your home will be more expensive all because you will be paying more in interest.

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