All aspiring homeowners in Utah are asking the same question: When will house prices drop?
Unfortunately, no one can predict exactly when this will happen or if it will happen. In the meantime, there may be one more important question home buyers should ask themselves: What if you wait to buy a home?
While it is tempting to wait for prices to cool down, there is another risk associated with postponing a buying decision. Bankrate reports that today’s interest rates remain low, but that “[m]all mortgage experts expect rates to climb above 3.5% by the end of 2021. ”
So what if interest rates rise while house prices fall? How do these numbers compare?
While a loan officer can help you answer this question based on your particular situation, here is a general overview of how interest rates can affect home prices. (You might be surprised by the results.)
An overview of the impact of different interest rates on homebuyers
To show you how even a slight increase in interest rates can affect the price of your home over time, consider the following hypothetical examples.
Suppose you qualify for a $ 400,000 home purchase with 5% down payment and your loan amount is $ 380,000. 10 years of 3% interest costs you $ 54,814.51.
Now watch what happens when you increase the interest rate from 1% to 4%. If you were eligible for a payment of around $ 1,600, you could now only spend $ 353,000 with a loan amount of $ 335,350 and pay $ 65,037.52 in interest over 10 years.
And if the interest rate goes up an additional 5%, a cheaper home is even more expensive. You could now only afford to buy a house for $ 314,000 with a mortgage of $ 298,300. Again, the payment would be the same and the loan would cost $ 72,846.60 in interest over 10 years.
It is simply by increasing the interest rate by 2% between the $ 400,000 house and the $ 314,000 house. The interest is considerably higher on the much lower loan amount and the payments are roughly the same. You can see how easily things can add up over the life of your loan, even if you originally bought a cheaper home.
Essentially, a 1% rise in interest rates is equivalent to a more than 10% drop in house prices. Over the past 20 years, even during the recession, prices have not fallen 10% in a calendar year in Salt Lake County. Ultimately, it can cost you more if interest rates rise than what you could potentially save while waiting for prices to drop.
Why interest rates could rise in 2022
While no one can pinpoint when and if interest rates will rise over the next few months, there are several factors that could cause interest rates to rise in 2022.
Currently, the hottest topic impacting mortgage rates is pending inflation. There are many opinions about how quickly mortgage rates will be adjusted to fight inflation, but most people agree that inflation is a fast approaching challenge.
Another thing that has an impact on mortgage rates is the Federal Reserve. To keep the housing market stable and stimulate the economy, the Federal Reserve will often buy mortgage bonds. If they choose to cut back on these purchases, interest rates will likely rise.
According to Investopedia, “The Federal Reserve aims to maintain economic stability and has an impact on bank lending rates. When the Fed wants to stimulate the economy, it usually becomes cheaper to take out a mortgage. And when the Fed wants to crack down on the economy, it acts to drain money from the system, which means borrowers will likely pay a higher interest rate on mortgages. “
The strength of the economy also plays a role in mortgage interest rates. When GDP and employment increase, it is a sign of a growing economy, which means more people with purchasing power. This creates greater demand for real estate. Since lenders have a limited amount of money to lend, they increase the rate so that they can lend more mortgages to more borrowers in the future.
The housing market has a similar impact on mortgage rates as the growing demand for real estate means growing demand for mortgages.
There are many other things that affect interest rates, but these are the things that are currently in the spotlight and why many believe rates will go up.
Benefit from lower interest rates
While no one knows exactly what the future holds, taking advantage of today’s lower rates seems like a good option for homebuyers who may be on the fence. Since Bankrate lists Utah’s housing market as the hottest in the country, it could be some time before prices start to fall. Locking in a good interest rate can be your best chance to save thousands or tens of thousands of dollars when buying your home.
To help you determine the best options for your situation, the Stern team is here to guide you through every step of the home buying process. For more information, call 801-788-4049 or visit sternteam.com today. If you have questions about financing, contact Mandi Henriod with Intercap Lending at 801-638-1005.