How Rising Interest Rates Affect the Housing Market (And You’re Mortgage)

The Federal Reserve has recently raised the federal funds rate for the first time since 2018 and is indicating even more interest rate hikes for the months to come. With these rises in interest rates, homeowners may be curious as to how this may affect them and what they can do to make financially sound decisions for the future. For new homeowners, you may be deciding between a fixed rate or a variable rate and looking at the advantages and disadvantages of each. Before jumping into this, it is important to understand the correlation between the federal funds rate and mortgage interest rates. Central banks will raise interest rates to cool off an economy and ease inflation, as higher rates will increase the cost of debt and discourage borrowing. These rate hikes affect all areas of borrowing, especially mortgages (the 30-year mortgage rate correlates heavily with the yield of the U.S. Treasury 10-year bond). Lessened borrowing results in slowed consumer demand and ultimately fewer homes being bought up, driving down prices and increasing rates. 

This is where interest rates will affect both new borrowers and those with variable rates, as new and variable interest rates will shift upward. Those who have obtained a fixed interest rate before rising interest rates will not have to be concerned about a rising rate environment, considering that their payments will remain the same throughout the entirety of the loan. Those who are purchasing a home with a fixed-rate mortgage within the rising rate environment will be affected by this as interest rates are determined by the federal funds rate within the specified timeframe. Borrowers with variable rates will need to be wary of rising interest rates, especially if they are used to paying lower payments. Once these rates change and go up, variable-rate mortgages will increase and result in a higher monthly payment. This is why it is a must to always account for what type of mortgage is best suited for you and how rising interest rates will affect your future payments down the road.