How Interest Rates Impact the Housing Market

Buying or selling a home can be an exciting life moment.

It can also be stressful, thanks to complex real estate processes and the massive amount of money the transaction implies. Prepare for this significant step in your life by getting informed.

A key concern for most homebuyers is securing a mortgage to cover the cost of their new home. So, learning the ins and outs of mortgages, including the role of interest rates, is essential. And it’s equally important for sellers to understand how mortgage rates affect the market as a whole—as these repercussions can directly impact their ability to sell their homes quickly and at top dollar.

With this guide to how interest rates impact the housing market, both buyers and sellers can enter a real estate transaction more prepared and knowledgeable.  

What is a mortgage interest rate? 

Mortgage loans comprise two parts: principal and interest. The principal is the amount you borrow to cover a home purchase after you make your down payment. Suppose you purchase a home that costs $350,000, and you make a down payment of $50,000. The mortgage lender covers the remaining $300,000, which is the home loan's principal. 

Interest is a percentage the lender earns on the transaction. Rates are shown annually, and the calculation to determine how much interest a homebuyer will pay is fairly complex. There are plenty of online calculators that can help you determine these figures once you know the amount you’ll borrow and the interest rate. But to give you a ballpark idea, the interest on a $300,000 mortgage at a fixed 5 percent annual rate works out to roughly $280,000 in total interest over the repayment period. So, even a small spike or drop in interest rates can imply huge expenditures or savings in the long run.

Borrowers make monthly mortgage payments toward the principal and interest of their loans. Depending on the type of interest rate—fixed or adjustable—the payment amount remains the same or changes. Folks with a fixed-rate mortgage pay the same monthly amount for the entire repayment period, while those with an adjustable-rate mortgage can get a bigger monthly bill if their interest rate hikes. 

What makes mortgage interest rates fluctuate?

Suppose you’re a buyer approaching a lender for a mortgage loan. Ideally, you want to score a favorable interest rate. If you get a fixed-rate mortgage, you’re locking in that great rate for the duration of the repayment period. If you get an adjustable-rate mortgage, you’re establishing a low baseline rate that can only increase a certain amount annually.

But what if the rates are higher or lower than normal when you apply for your loan? You’d be left wondering why.

Mortgage interest rates fluctuate based on a variety of factors. A strong economy can make interest rates rise, as can jumps in Federal Reserve interest rates (which impact financial institutions, and in turn, the people they lend to). Other factors, like inflation and market movements, can also cause fluctuations. 

It’s worth mentioning that it’s not only external factors that determine an interest rate. Your credit score and financial health, as well as the cost of the property you’re purchasing, can also influence the rate. 

How interest rates impact borrowers and the market

High interest rates can deter home buyers from purchasing homes because, ultimately, they’ll pay more over time thanks to that elevated rate. In turn, the real estate market slows, taking a downturn. Home sellers may react to the lack of demand by lowering the price of their properties, making them more attractive and feasible purchases to buyers. 

Conversely, the housing market gets hot when there are low interest rates. Buyers have more impetus to purchase a home because of favorable interest rates. So, demand increases, and sellers can set home prices higher.

High interest rates? How sellers can survive a slowdown

When interest rates are high, the market presents a difficult landscape for sellers. And if you’re a seller who can’t wait for lower interest rates to put your property on the market, you’ll have to weather the storm. Sellers in a slow housing market can use the following tips to attract homebuyers and still make a high-value sale. 

Work with an agent

The for-sale-by-owner (FSBO) route can be tempting if you’re trying to avoid paying real estate commissions. But taking that journey can cost you in the long run. You get a top-notch suite of services and protections by hiring a realtor.

Agents are experts on the legal and procedural nuances of real estate transactions, ensuring you don’t run into issues and setbacks. They’re also vats of knowledge: on markets, making your home more attractive, and marketing the property correctly. What’s more, agents are savvy negotiators who’ll fight for a fair sale price, even in tough market conditions.

Renovate

Perform cosmetic upgrades that’ll make buyers’ heads turn. Prospective buyers can be swayed by aesthetically pleasing properties that feel “turnkey”—that is, move-in ready. Sometimes, a fresh coat of paint or trendy, new bathroom tile is enough to get buyers excited about a home.

Check out a cost-versus-value report to learn about high-ROI (return on investment) upgrades or ask your real estate agent for advice on renovations. Realtors are experts on what buyers want and indispensable resources on what resonates with your local housing market. When you work with a top listing agent who partners with Titus, this professional can also help you access an exclusive, interest-free loan for renovations.

Repair 

Pending repairs can be a major turnoff for buyers. Get a home inspection done and determine issues with your home. Then, make essential fixes. Not only will you present a buyer with a headache-free property but you’ll also lessen their bargaining power. A buyer will have a harder time negotiating on price if your home is flawless. 

And while some repairs can be quite expensive, you can cover them with credit from Titus. You’ll work hand-in-hand with an expert agent who will help you move your home in even the most difficult markets and give you access to a Titus credit line. 

Work with a Titus agent to get expert guidance and more

If you’re selling your home, you want an excellent advisor, negotiator, and supporter in your corner. Titus partners with only the best realtors: professionals with an impeccable track record who get results. 

When you work with a Titus affiliate realtor, not only can you rest assured this top-ranked real estate agent will drive a sale, but you’ll also gain access to a line of credit that only they can access on your behalf. Titus’s closing lines of credit (CLoCs) are intended for renovations, repairs, and moving or storage fees—making your home sale process agile and successful. And credit lines of up to $25,000 have a 0-percent interest rate. Learn how it works here.