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How Rising Mortgage Rates Affect Homebuyers

The days of incredibly low mortgage rates are officially behind us, at least for a while. After the Federal Reserve boosted interest rates multiple times in the last few months, homebuyers must grapple with a new reality. Let’s take a closer look at the correlation between these higher rates and house prices, and why it’s still a good time for buyers to make their move.

What’s the reason for higher rates?

One word: inflation. Americans continue to struggle with price increases everywhere, from the grocery store to the gas pump and everywhere in between. It’s a major concern that inflation reached a 40-year high and shows no signs of slowing down.

Fed Chair Jerome Powell expressed his desire to get inflation down to 2% in January. One of the quickest ways to do that is by raising the federal funds rate, which tends to also direct mortgage rates and other forms of borrowing. Remember, though, that the Federal Reserve does not set mortgage rates.

According to industry professionals, buyers should expect up to four more rate hikes in the second half of 2022. Whether those increases will be large or small is unknown at this time. But what is certain is that mortgage rates hit their highest level since 2008 after rising almost three-quarters of a percentage point in a matter of weeks.

Do interest rates affect home prices (and vice versa)?

They sure do. Think back to 2020 and 2021 when the pandemic created a perfect storm for the real estate market. A combination of record-low rates, minimal homes on the market, and high demand caused property values to skyrocket across the country, especially in Colorado.

The market is shifting and will continue to do so moving forward. We’re seeing more people list their homes, translating to greater inventory throughout the Front Range. A larger supply of available homes coupled with higher rates means less competition and, in turn, lower prices for prospective buyers.

Now, what do we mean by ‘lower’ prices? We aren’t referring to a housing crash where prices tank and leave borrowers underwater on their loans. Such an occurrence typically only happens when there’s an excess of homes for sale and not enough buyers, which we saw during the 2008 housing crisis.

Experts predict a national home price increase of 6% in 2022 and 3% in 2023. That’s a stark difference from the 20% increase in Colorado property values we saw last year. But even percentage gains of single digits make homeownership a solid investment, regardless of what may be happening with interest rates.

What are mortgage rates now and where are they headed?

Hopeful buyers could find rates in the low 3s in early January 2022. Rates then gradually climbed to 4% and then, more recently, 5%. Fast forward to the time of this writing in June, as rates are near 6%.

Whether you’re looking to buy your first, next, or forever home, you may be skeptical about purchasing a residence when rates are nearly double what they’ve been the last few years. As difficult as it is to believe with so many rate increases this year, competitive rates and custom loan options are still available. It’s just a matter of finding the right lender and program for your specific needs. 

There’s also the notion that rates could be even higher in 2023 and beyond. According to a recent survey from Money.com, most households predict the popular 30-year fixed-rate loan to approach 7% next year and 9% by 2025. That’s why it’s worth doing everything you can to buy a home now and avoid costlier rate increases down the road.

How much house can you afford right now?

Let’s say your maximum monthly payment is $3,000. You’ve decided this property will be your forever home, so you don’t mind budgeting for a slightly higher amount. With a 5% interest rate and a 20% down payment, you could afford a home price of $502,000.

In this scenario, you’d have much less flexibility with a 6% interest rate. Using the same maximum monthly payment of $3,000 and a 20% down payment, your home price affordability drops to $468,000. The difference of $34,000 could be the difference between landing and missing out on your dream home.

Get started with the home buying process

At American Home Agents, we’re here to help you make sense of the Colorado housing market. Our dedicated team can also connect you with American Financing, a family-owned lender that has been helping people like you for over two decades. 

Best of all, if you choose to work with American Financing, you can lock your rate for up to 120 days. That way, you can take your time finding the right home and know you’re getting the best deal.

Ready to get started? Call American Home Agents at (303) 695-5900.

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