Mortgage Musings - What Happens When Rates Rise?

May 17, 2021

Mortgage interest rates fluctuate; this is a fact. Over the past year, during and throughout the height of the pandemic, they have remained low. At some point in the future, they will rise. It won’t likely be in the next few weeks. It might not even happen for months. But at some point, rates should rise. If sustained inflation continues, they may rise soon. How will that impact real estate markets? Below are some ideas, curated by Leonard Steinberg, Chief Evangelist of Compass.

• When rates rise, they probably won't rise much. Remember in 2018, the 30-year fixed-rate mortgage was approaching 5%? Today it's around 3%.

• When rates rise, buyers may be able to afford less...UNLESS rates rise because of rising incomes, which would reduce the impact of a higher interest rate.

• The intensity of multiple bidding MAY subside in certain areas, yet the forces of supply and demand still remain, regardless of interest rates.

• Profitability of companies could be impacted as debt service will be more expensive…but if prices have gone up, this could be offset.

• Those with large swaths of cash will get better returns on their cash investments, and have more disposable income. Consumer spending comprises roughly 70% of the US GDP.

• When interest rates rise, they will probably rise slowly.

• When interest rates rise because of inflation, it is because things cost more to build, too - including homes.

• Rising mortgage rates could fuel better inventory levels and more rational bidding.

Knowing that mortgage rates will not forever remain this low is critical in weighing the decision to buy now or later. Talk to a trusted lender to understand what you can afford now versus at a higher interest rate. As an example, a $500,000 mortgage at 3% is almost $600 cheaper per month than a 5% mortgage. That's a $215,000+ savings over 30 years.