- The new, higher interest rate impacts monthly mortgage payments.
- The silver lining may be fewer buyers competing for homes.
The most recent rate hike may not be all bad news for home buyers.
The fact that the Federal Reserve raises interest rates to slow down inflation is of little comfort to those of us attempting to buy a home. Without asking any of us how we felt about it, the Fed approved a rare 0.50% interest rate increase earlier today.
While the Fed's action does not directly impact the rate at which mortgage lenders offer loans, it does play a huge role. That's because the higher the prime rate (the rate the Fed heavily influences), the higher the rate charged by banks.
Upon hearing the news, I immediately called the loan officer in the state we're moving to. Unsurprisingly, in anticipation of the Fed's announcement, the rate we'll be paying if we lock in now is more than 0.50% higher than it was earlier this week.
For home buyers, it's frustrating. For home sellers, it's worrisome because we don't know how the hike will impact the sale of our homes.
Still, as someone who purchased their first home when the interest rates hovered between 17% and 18%, I'm a pro at looking for the positive.
The silver lining in the housing market
Hopefully, my husband finds a house to buy this weekend (no pressure, Bobby). Depending on what he finds, the rate change means our payment will increase between $100 and $200 per month. We can absorb that.
Some home buyers will not be able to. Anyone with less-than-perfect credit is likely to see a bigger jump in payment, and those who were already cutting their personal budget to the bone to buy a house are likely to pull out of the market.
From the bottom of my heart, I don't want that for anyone. But, since it's a reality, I've decided that it may be the silver lining. Competition for homes has been intense and because we're not about to pay more for property than it's worth, this may be our chance to slip into a house without a dreaded bidding war.
A new strategy?
Although we don't know when it will happen, the Federal Reserve's Federal Open Market Committee has also indicated it may raise the rate five more times this year. Our strategy is to buy as soon as possible to avoid paying an even higher rate.
And yet, we refuse to pay too much for a house simply so we can get in before rates go up again. Speed shopping rarely leads to smart financial decisions, at least in our case. But anticipating a raise, my husband and I set up six showings over the next couple of days.
I created a spreadsheet that includes the address of each home, the asking price, and any special features I appreciate (for example, I like the idea of having a bathroom in a finished basement). I added anything I suspect we'll end up spending money on after move-in. It includes things like new flooring and getting rid of Hollywood lights in restrooms (nothing screams 1990s like Hollywood lights).
By comparing one property to another, I was able to rank the houses from most desirable to "we can make it work." My goal is to treat house hunting like a math problem rather than get emotionally tied up in what we buy. If I end up really liking a house, that will be awesome, but now is not the time to fall in love and make irrational decisions.
Narrowing our focus
It occurs to me that this hike in interest rate has focused our attention on the task at hand, which is buying a home so the dogs and I have somewhere to move to once our house has sold.
And because of the higher interest rate, we're tightening our house hunting criteria and looking at properties a bit smaller than we initially planned to buy.
At the end of the day, rates go up and down. The most any of us can do is create the best hand possible using the cards we are served.
If you're watching the rate change and wondering how much house you can afford,take a look at our handy guide to get some practical tips for calculating your payments and managing your home ownership budget.
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