Homebuyers and sellers share at least one common concern – interest rates.  The ups and downs of mortgage rates profoundly impact the affordability of homes for buyers and sellers’ ability to sell at their desired price and time.   Last December, 30-year fixed rate mortgages were available at just over 3 percent.  In 12 months, the rate has doubled causing lower demand for homes and more days on the market.  In recent weeks, rates have decreased slightly as the Federal Reserve has slowed interest rate increases.

Investopedia offers a simple explanation of how rising mortgage rates affect buyers and sellers.  In essence, higher mortgage interest rates may decrease the amount for which a homebuyer may qualify.   For example, a buyer with a 4% rate on a 30-year fixed mortgage buying a $400,000 property would expect a monthly mortgage payment of $1,900. At a 5% rate, the monthly payment would rise to $2,138. The 1% increase in interest raises the payment by $238, or roughly 13%.  The homebuyer now may only qualify for a $355,000 loan so a 1% increase in mortgage interest decreases purchasing power by $45,000.

Rising mortgage rates affect sellers differently, says Investopedia.  A seller listing a home at $400,000 may find that rising interest rates means potential buyers can only afford the home at $355,000.  The seller may still make a profit on the sale, but a 1% increase in mortgage rates could diminish the market value by about $45,000.

The Mortgage Reports advises buyers to improve their credit to get the best mortgage rates possible by checking their free credit reports for errors and paying down debt.  “Any way an applicant can reduce the risk to a lender will allow them to offer the best option available.”  A larger down payment will also lower a lender’s risk as well as the monthly payment.  A buyer with at least a 20 percent down payment can reduce the payment by eliminating the private mortgage insurance requirement on a conventional loan.  

AAR asked Alabama brokers to share their best tips for buying a house in a market where interest rates present a challenge to potential buyers.  Here’s their best advice:

Be Prepared to Refinance

Zelda Friedman, Managing Broker at Crye-Leike Real Estate Services in Huntsville, says buyers can always refinance their home when interest rates go down. “It is always a good idea for buyers to keep an eye on the market."

Mechelle Wilder, Associate Broker/Partner at ARC Realty in Vestavia, agreed. “What I have been telling buyers is that home prices are continuing to appreciate so I would still buy a home with higher interest rates because you can finance a home with an adjustable mortgage of around 5% and refinance before the end of that term when rates decrease. There are even some mortgage companies that will not charge to refinance a first mortgage once the interest rates have become lower. They need to check with their lender for the best program for them.”

Shop Around for Lenders

“Today's purchasers should always shop around with different lenders,” said Lee Harris, Broker/Owner at Auburn’s Coldwell Banker Alliance.  “Many lenders today are offering new packages and incentives that we have not seen in quite some time. It is imperative to not just look at the rate! Be sure to compare the overall package that is being offered including buy downs, closing costs, lender credits, etc."

Look for Lender Options

Friedman advises buyers to work with a REALTOR® and check for lender programs for veterans, the disabled, or for different loan types. “REALTORS® are a great source of connections if buyers need a lender, title company, home inspector or insurance company,” she explained.

Rely on REALTORS® for Market Advice

Buyers should listen to their REALTOR®'s advice on current market conditions, Friedman said. “Days on market are longer now with the average in our area up to 14 days on market.  It has been as low as nine days on market.”  Using that market knowledge may allow a buyer to purchase a house for less than list price and lower the payments.

Take the Long View

Wilder tells buyers that investing your money in a home is still the best way to build wealth. “Even though the market is slow right now,” she explained, “it will come back around and in 5 to 10 years the equity in your home will have increased in value sometimes better than the stock market.  I tell my buyers that home ownership is similar to a monthly savings account that you invest in regularly while at the same time enjoying its benefits as it increases in value.”

Know Your Limits

Harris warned that buyers also need to feel comfortable with whatever the monthly payment will be. “While we may hear that you can always refinance later, it is important to keep in mind the REALTORS®, lenders, and brokers (myself included) do not know what interest rates will do in the future,” he said.  “Buyers need to be prepared for a scenario where a future refinance may not be the best option.”

“While home buyers in today's market face new challenges with the rise of interest rates, many of the same rules still apply,” said Harris.