As you may have seen in recent national news, the Federal Reserve will be increasing interest rates. These interest rate increases are predicated on the continuing healthy economy, low unemployment, and the overall good health of the market . This increase in short-term interest does not target specific industries, however it does affect several that use loans as a part of daily business activities. One such industry is the real estate market. The Federal Reserve’s actions can affect adjustable rate mortgages and to a lesser extent fixed-rate mortgages. These effects are as follows.
Effect On Mortgages
- Adjustable Rate Mortgages: These will be affected in the following ways. Due to the fact that adjustable rate mortgages are reviewed annually any increase in rates will, in turn, increase the amount of interest due monthly. Note that there may be a delay in this due to when refinancing occurs, but the changes may be notable depending on the value of the loan itself.
- Fixed Rate Mortgages: Please note that this refers to new fixed-rate mortgages and not existing ones. Fixed rate mortgages will be far more resistant to federal interest rate changes. When viewed over the long term (fixed rate mortgages being 15 or 30 years long) these rates tend to follow inflation rates more than they do federal interest rates. Also, depending on how the market responds to the Federal Reserve being viewed as controlling inflation with these measures, the interest rate of 30-year mortgages could go down.
Real Estate Purchasing Considerations
Now certainly an increase in overall real estate cost is nothing to be pleased with. That being said, while it should be carefully considered when making real estate discussions it shouldn’t be overvalued in the overall process. Here are four considerations to keep in mind.
- The Long-Term Value Of Real Estate: A key aspect of real estate that makes it an active investment is that it tends to increase in value over time. In many cases, the increase in the value of a property or home will greatly surpass any interest rate increases.
- Real Estate Protects Against Inflation: Due to real estate’s tendency to appreciate in value, it serves as useful investment tool when held over a long period of time. When compared to other investment options that are more flat in terms of their overall return, real estate offers strong value and can be used for portfolio diversification.
- This May Not Be The Best Time For Refinancing: Interest rate increases can make refinancing an existing fixed rate mortgage a less attractive option. However, this depends greatly on your existing financial situation. Even with higher interest, refinancing may still be desirable if you have a specific goal in mind such as shortening the length of your mortgage loan.
- Other Market Effects: An increase in interest rates may discourage some marginal buyers from purchasing real estate. This could reduce overall real estate costs as there are more homes for sale in a market with less interested buyers. There are also industry experts calling for an increase in construction to keep rate increases low.
The Federal Reserve’s increasing of interest rates will have an effect on real estate purchases. Those most affected by these changes will be ARM holders, those seeking to secure new loans, and homeowners seeking to refinance existing fixed-rate mortgages. Real estate nonetheless remains a solid investment with a long-term growth pattern and an increase in federal interest rates should not deter you from making well thought out and researched real estate purchases.
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