By Bryan Mapenzi

The last several months have been a financial whirlwind for many. Inflation has been ravaging discretionary funds and demeanors left and right. This “invisible tax” has caused everything we purchase to be more expensive and in order to tame it, the Federal Reserve has raised interest rates at an alarming rate, increasing dramatically since the beginning of the year. For context, every 0.25 percentage-point hike of interest rates equates to paying $25 more per year on 10,000 of interest.  At first glance, this appears to be a menial amount, but over time, especially on a mortgage, this adds up. 

Because rates have risen so fast, the journey to homeownership might be a bit more complicated and nuanced. Today, we discuss the implications of these rising interest rates for prospective homebuyers.

Why are interest rates rising?

Interest rates dictate how much we will pay back on everything from personal loans, auto loans, credit cards, and mortgages. Naturally, the more we have to pay back, the more unwilling we as the consumer will be to take on debt. This recent and drastic increase in interest rates has been the Federal Reserve’s, or the central bank of the US, deliberate effort to cool down inflation. Because prices have been astronomically high due to inflation, the Federal Reserve has been aiming to slow down spending efforts by increasing interest rates.

The double-edged sword with this decision influences homebuying activity. These rising rates now make it more expensive to have a mortgage for prospective homebuyers everywhere in the United States. As it stands, the current average interest rate for a mortgage in August 2021 is 5.63%, making 28% more expensive than it was in August 2021. Higher rates influence fewer home purchases, thus driving down demand and, in most cases, home prices. This creates a more friendly environment for those looking to purchase homes versus those looking to sell.

If this is you, meet me over in the Fab Fam Community where I share tips and resources to help along your homebuying journey.

Buyer’s market vs. seller’s market

The days of homes flying off of the block in less than a week are in the rearview. Rising interest rates have created a built in cooling of the market, at least on the pricing side of things. The paradox is that when interest rates are low, more people buy homes, thus increasing prices. With interest rates rising, the market is becoming more of a buyer’s market, due to slowing demand. One thing that is still making the market a bit more difficult for buyers is that inventory is still relatively low, but up from record lows in January

With low inventory and prices still slightly climbing, this sticks buyers between a rock and a hard place. Plainly speaking, it means higher monthly mortgages and higher overall costs during the life of the loan. Due to overall inflation slightly cooling in July to 8.5%, there is most likely more room for increased rates by the Fed to curb prices climbing even further. The silver lining is that mortgage rates on average are in the 7% range, so current rates still sit roughly 1.5% percentage points below that. Here are actionable steps one can do to make themselves a good candidate for lower rates:

  • Prioritize your credit score
    • Reducing and/or eliminating high interest debt and paying on time are the biggest catalysts to increasing and sustaining your credit score. Shoot for 740+ for the best rates.
  • Don’t be afraid to shop around
    • Check multiple places to see which rates are best for you. Even a quarter of a percentage point (0.25%) can make a world of difference on a 30-year mortgage.
  • Analyze what your goals are
    • For some, home ownership is a key avenue for building wealth. Analyzing if it the best time and consulting with your financial advisor can put you on a path to know if now is the right time for you.

Make it personal

There are tons of useful and confusing information about where the market is going. Ultimately, no one knows the future and diving into what is possible for your individual financial situation is the most important piece. Personal finance is always personal so keep that in mind while optimizing your credit score and shopping around for the best rates will put you in the best situation to land an investment property, a second home, or the home of your dreams.

Happy house hunting!

 If you’re looking for more, join our very own private accountability club, the Fab Fam Community. It’s the place to be for help with every aspect of your financial journey.

Not sure where you stand where you stand with your finances? Find out today by taking the Money Persona quiz.

*Featured image via Shutterstock




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Created by nationally recognized millennial money expert Tonya Rapley, My Fab Finance is a leading financial education and lifestyle blog for millennials who want to become financially free and do more of what they love.