weather icon Mostly Clear

What do rising interest rates mean for homebuyers

What will rising interest rates mean to you if you are considering purchasing a home or doing a cash-out refinance loan?

Fed funds rate. Mortgage-backed securities. Ten-year treasury. Thirty-year treasury. Federal reserve board. Mortgage interest rates. These are all commonly used terms, but what do they mean to us as potential borrowers?

In the near future, we are all going to have to ask ourselves: Do we want 3 percent mortgage interest rates with a sluggish recessionary economy — or 6 percent rates with a booming vibrant economy?

Mortgage rates bottomed out during the depths of the coronavirus pandemic as the Federal Reserve Board moved to keep the economy afloat by using a process called quantitative easing. Think of the lemonade stand that your children set up… but you were the only buyers? But now as the Fed returns to pre-pandemic policy, interest rates are rising, and likely will continue to rise. How quickly they rise and how high they will rise depends upon a multitude of economic factors.

Let’s take a look at what is driving interest rates higher. The answers are complex, but I like to start with the old adage: “What goes up must come down,” and vice-versa!

The Federal Reserve Board does not set mortgage interest rates — but their decisions definitely influence mortgage rates. The Federal Reserve sets borrowing costs for shorter-term loans in the U.S. by moving the fed funds rate. The fed funds rate is the rate at which commercial banks borrow and lend to each other overnight. This rate, during almost the entire time of the pandemic, was set at 0.25 percent — a historic low. On March 16, that rate was moved up 0.25 percent, sitting at 0.50 percent. The Fed Committee further indicated continuing increases at its remaining six meetings this year. They are attempting to combat spiraling inflation without severely slowing the economy. A delicate balance!

Movement, either up or down, of the fed funds rate influences corresponding movement in Treasury Bonds. Mortgage interest rates, those that we are most concerned with, are most closely tied to movement of the 10-Year Treasury Bond. Why would what is typically a 30-year fixed mortgage loan be tied to a 10-year bond? The answer is because most mortgage loans tend to pay off over a 10-year timeframe as homeowners refinance, move, or otherwise pay off their loan.

So what is the prediction for the 10-Year Treasury Bond? Treasury bond yields go up if the Federal Reserve raises the fed funds rate, or merely if they indicate a desire to increase the rate.

Where does that leave us, the consumer considering buying a home or thinking about using their new found equity to do a cash-out refinance loan? The good news is that the predicted rate increases in both the fed funds rate and the corresponding 10-Year Treasury rate are forecast to be small. Thus the increase in the mortgage interest rate will also, hopefully, be small.

Although the historic interest rate lows brought on by the worldwide pandemic are now in our rearview mirror, I think it’s a good time to look forward. A philosopher once said: “Looking back gives you regrets. Looking ahead gives you opportunity.”

Lets’ look at some actual numbers to see what makes sense, today. If you are considering a home purchase that would give you a mortgage balance of $400,000, then a 2 percent rate increase would make a $500 per month difference in your payment. If this increase doesn’t stop you from qualifying, then you may need to consider a few things. Do you think it is reasonable to assume the home you are buying may increase in value by $6,000 a year over the next five years? And, what are the other benefits of homeownership?

What if you were considering a cash-out refinance, but now you are reconsidering because rates have moved up? Once again, I think it’s prudent to run the numbers and see if they still make sense. If you were going to pull out cash to pay off higher rate debt, like credit cards, or if you wanted to unburden yourselves from that student loan debt, or if you just wanted to build a nice nest egg in your bank account — do the numbers still make sense to you? Can you save yourselves $500, $1,000, $1,500 a month in payments by taking out that loan? If it does, you may still want to act now.

To see an opportunity we must keep an open mind. Alexander Graham Bell said: “When one door closes, another opens, but we often look so long and regretfully upon the closed door that we do not see the one which has opened for us.”

Rick Piette is the regional sales manager for All Western Mortgage.

Don't miss the big stories. Like us on Facebook.
2024 real estate predictions; tips for homebuyers

It’s no secret the housing market has been a whirlwind over the past few years, so it’s only natural that many may be feeling overwhelmed and uncertain about what the future holds for the 2024 market.

Building lasting client connections in real estate

Throughout my real estate journey, I’ve discovered that building lasting client relationships is the most crucial aspect of leading a successful business.

The basics of Las Vegas land investment

New buyers and real estate investors may initially feel overwhelmed by the prospect of land investment, but it doesn’t have to be an intimidating journey.

How to better serve Gen Z and millennial homebuyers

Rapid surge in property values has introduced affordability hurdles for many millennials, those born between 1981 and 1996, and Gen Z individuals, those born between 1997 and 2012, making the dream of homeownership intangible. Therefore, understanding how to provide support to these buyers has become increasingly important.

Cultivating a vibrant real estate company culture

In the dynamic world of real estate, success is often measured in numbers — deals closed, properties sold, profits made. But beneath the surface of these metrics lies a vital force that drives a company’s true achievements — its culture.

Demand for luxury apartments continues to increase

According to reports by Coldwell Banker, 2023 will be a record-breaking year for apartment complex completions in Las Vegas as 19 high-end multifamily developments have or will be completed this year or by early 2024 — adding 7,000 units to the city’s inventory. By contrast in 2022, only 882 units came online.

What’s the difference between real estate agent and Realtor?

Lately with the real estate market being so hectic with inventory down and interest rates up clients — both buyers and sellers — have asked me what is the difference between a Realtor and someone else who also has a real estate license but they are just a real estate agent.

What owners, agents should look for in home inspections

A home inspection is a crucial step in the process of buying or selling a property. For both real estate agents and homeowners, understanding what to look for in a home inspection is essential to ensure a smooth transaction and make informed decisions.

Four proven strategies for finding off-market inventory

“Off-market listings” or “quiet listings” are homes that are for sale but aren’t listed on multiple listing services.

Will normal real estate inventory levels return?

The real estate market is experiencing unprecedented dynamics, raising questions about the possibility of returning to normal levels of inventory.