Most real estate investors can’t afford to buy a property with their own hard cash, so they turn to lenders to receive the proper funding. When shopping for a loan, one of the most important aspects you have to look for is the mortgage rate. Mortgage rates refer to the interest a lender charges for a home loan, affecting the total cost of money borrowed. However, mortgage rates have recently increased, and many investors and landlords wonder what higher mortgage rates will do to real estate.
Higher Mortgage Rates Make It Harder To Borrow
The average interest rate will vary depending on the length of the mortgage paired and the annual percentage rate (APR). However, for the sake of simplicity, let’s use the average mortgage rate. Currently, the average is a 30-year fixed rate with an interest rate of 6.35 percent, but when we take APR into consideration, that number bumps up to 6.45 percent. The average price of a home in the US is about $400,000. Without interest rate, that’s a mortgage payment of about $1,111 a month, but with the APR, that number jumps up to around $1,200.
This number isn’t feasible for every home buyer or investor, and ultimately, higher mortgage rates make getting a loan and buying property inaccessible to many people.
New Investors May Struggle To Purchase Properties
For new investors just breaking out into the world of real estate, higher mortgage rates make it difficult to get off the ground. The more inaccessible loans are, the harder it is for investors to buy property, which has a serious domino effect on the rental market. If new investors can’t enter the field and the real estate market contains mostly older, more experienced investors, this can quickly lead to a lack of competition. As a result, a lack of competition means fewer choices and higher prices for home buyers, renters, and other investors, thus continuing the cycle.
Homeowners May Turn to Rentals
For well-established investors that already have a decent portfolio, they may not see as much of an effect when interest rates rise. If home buyers can’t afford to take out a loan to buy a home or a homeowner’s interest rate increases, many people will have to downsize and ultimately turn to rental properties. Again, this may be fortuitous initially to established investors, but as the demand for rentals increases, someone will have to bridge the supply gap. If mortgage rates continue to increase, it will be up to the few investors who can afford it to bridge the gap, which may not be enough to meet the demand.
Unfortunately, higher mortgage rates can do serious damage to the real estate market, but the forecast is hopeful, as it seems to be coming down from its recent incline.
At Excalibur Homes, we understand the importance of saving money, which is why we offer our leasing and property management services at competitive prices. We’ll work with you to provide a service package that fits within your budget.