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Every aspiring homeowner in Utah is asking the same question: When will home prices drop?
Unfortunately, no one can predict exactly when that will happen or if it will happen. In the meantime, there's perhaps a more important question homebuyers should be asking: What happens if you wait to buy a home?
While it's tempting to wait for prices to cool down, there's another risk that comes with putting off a purchasing decision. Bankrate reports that today's interest rates remain low, but that "[m]any mortgage experts expect rates to climb above 3.5 percent by the end of 2021."
So, what happens if interest rates rise as home prices go down? How do those numbers compare?
While a loan officer can help answer that question based on your specific circumstances, here's a general look at how interest rates can affect home prices. (You might be surprised by the results.)
A look at how different interest rates impact homebuyers
To show you how even a slight increase in interest rates can affect the price of your home over time, consider the following hypothetical examples.
Suppose you qualified to purchase a $400,000 home with 5% down and your loan amount was $380,000. 10 years of interest at 3% costs you $54,814.51.
Now look at what happens when you raise the interest rate by 1% to 4%. If you were qualified for a payment of about $1,600, you would now only be able to spend $353,000 with a loan amount of $335,350 and would pay $65,037.52 in interest over 10 years.
And if the interest rate goes up by an additional percentage to 5%, a cheaper home is even more expensive. You could now only afford to purchase a home at $314,000 home with a $298,300 mortgage. Again, the payment would be the same and the loan would cost $72,846.60 in interest over 10 years.
That's just by raising the interest rate by 2% between the $400,000 and the $314,000 home. The interest is substantially higher on the much lower loan amount and payments are pretty much the same. You can see how things can easily add up over the life of your loan even if you initially purchased a cheaper home.
In essence, a 1% rise in interest rates is equivalent to over a 10% drop in housing prices. In the last 20 years, even during the recession, prices did not drop 10% in a calendar year in Salt Lake County. In the end it may end up costing you more if interest rates rise than what you could potentially save by waiting for prices to drop.
Why interest rates might climb in 2022
Although no one can accurately determine when and if interest rates will rise in the coming months, there are several things that could cause interest rates to go up in 2022.
Currently, the hottest topic impacting mortgage rates is pending inflation. There are many opinions regarding how quickly mortgage rates will be adjusted to combat inflation, but most people agree that inflation is a fast-approaching challenge.
Another thing that impacts mortgage rates is the Federal Reserve. To keep the housing market stable and to boost the economy, the Federal Reserve will often purchase mortgage bonds. Should they choose to reduce these purchases, interest rates will likely rise.
According to Investopedia, "The Federal Reserve aims to maintain economic stability and impacts bank lending rates. When the Fed wants to boost the economy, it typically becomes less expensive to take out a mortgage. And when the Fed wants to clamp down on the economy, it acts to drain money from the system, which means borrowers will likely pay a higher interest rate on mortgages."
The strength of the economy also plays a role in mortgage interest rates. When GDP and employment rise, it is a sign of a growing economy, which means more people with buying power. That creates a greater demand for real estate. Since lenders have a finite amount of money to lend, they raise the rate so that they are able to lend more mortgages to more borrowers in the future.
The housing market has a similar impact on mortgage rates since rising demand for real estate means a rising demand for mortgages.
There are many other items that affect interest rates, but these are the items currently in the spotlight and the reason that many believe rates will rise.
Take advantage of lower interest rates
Though no one knows exactly what the future holds, taking advantage of today's lower rates appears to be a good option for homebuyers who may be on the fence. Given that Bankrate lists Utah's housing market as the hottest in the nation, it could be a while before prices begin to drop. Locking in a good interest rate may be your best chance at potentially saving thousands or tens of thousands of dollars in the purchase of your home.
To help you determine the best options for your situation, The Stern Team is here to guide you through each step of the homebuying process. For more information, call 801-788-4049 or visit sternteam.com today. If you have any questions about financing, get in touch with Mandi Henriod with Intercap Lending at 801-638-1005.