How Rising Interest Rates Will Affect Your Home Search, According to a Mortgage Pro

The past few years have presented a plethora of challenges for hopeful homeowners due in large part to the sudden drop in inventory and increase in demand brought on by the pandemic. But now, a new hurdle has presented itself: rising interest rates. The Federal Reserve Board (aka the Fed) has met multiple times this year to discuss the growing concerns surrounding inflation and to come up with a solution to help consumers battle the sticker shock they are facing every time they head out to the grocery store or click "add to cart." Unfortunately, their solution has the potential to hit those shopping for a new home (or a lower interest rate on their existing home) the hardest.

The Federal Reserve Bank's decision to increase rates has some worried that their dream of owning a home has just been pushed out of reach. Here's what a mortgage pro has to say — and what you can expect during your upcoming home search.

Before you can understand how rising interest rates will affect your home search, it's important to first learn how the Fed actually affects borrowing (which is how most consumers purchase a home). The Fed controls how much it costs banks, lenders, and creditors to borrow the funds that they use when they extend credit, whether it be in the form of a mortgage or a credit card.

Short-term, adjustable rate loans, like your Visa or Mastercard, are the first to see the effects of these changes since their rates more closely mirror the fluctuations in the market. While those short-term loans often change the quickest, your wallet is likely to see a much bigger hit on your larger-scale loans, like mortgages, since even a small change to the interest rate can have a big impact on how much your mortgage payment will be.

When banks are able to access the money they lend at a lower cost, they pass that savings on to their customers, making it easier to borrow. When those prices increase, like the Fed voted to do on June 15, it gets more expensive for the average consumer to borrow money. In short: Those changes can mean a larger monthly payment for hopeful homebuyers. And, if the rate hike is big enough, some borrowers may find that their actual buying power suffers — since you'll pay more money in your monthly interest payment, therefore lowering how much money you can actually afford to borrow at this new price.

Once you understand the role the Fed plays in borrowing, it's easier to comprehend how this news could make buying or refinancing your home more expensive. According to a statement shared on its website on May 4, "the Board of Governors of the Federal Reserve System voted unanimously to approve a half percentage point increase in the primary credit rate to one percent."

This change comes after nearly two years of record low rates that were put in place to help keep the economy afloat during the pandemic.

According to Robert Heck, VP of mortgage at Morty, rates actually improved a bit (lowered) after the Fed's meeting since the decision to make the change renewed confidence in the organization's ability to stamp out inflation without extreme rate increases. "A half-point interest rate hike, while the largest in two decades, wasn't a surprise, and it's been largely priced into the market over the past few weeks," Heck explains, adding that it will take a while for this rate change to trickle down to the housing market. Borrowers likely won't really start feeling the squeeze until the end of 2022.

Since the mortgage markets largely follow the lead of the pricing of 10-year Treasury notes, lenders will be watching this market extra closely to see how they should set their rates. If those Treasury notes don't move too much, it's unlikely that the Fed's decision will have too large of an impact on the price hopeful homeowners pay to purchase a new home or what current homeowners will see when they try to refinance their existing mortgage.

Unfortunately, for those who have been struggling to buy a home in this tight market, the news doesn't mean that the pool of buyers is going to shrink too much right off the bat. "Rates have already risen significantly, but demand, while softened somewhat, still persists, largely as a result of low inventory in many markets," Heck says. "Where things head from here really comes down to inflation and whether or not the market settles in at these rate levels."

This means that while the Fed's decision will cause some to pinch some pennies when it comes to borrowing money, it's unlikely to change the landscape of the current housing market too much.

It's clear that we're in uncharted territory right now after spending two years dealing with a global pandemic. A lot of experts are making decisions based on what they expect (or hope) to see happen instead using long-term precedents, but as of right now, it doesn't seem like anyone thinks that the real estate boom has come to an end.

"Rates ​could​ rise to a level at which they could send demand and affordability into a steep downward spiral," says Heck. "That said, current market indicators are not projecting interest rate levels in the next 10 years to reach a level that would send mortgage benchmarks above 7 percent."

And while Heck says affordability has certainly taken a hit as prices and rates have gone up, there's still opportunity in the market for those who are ready to buy. His advice? Current rate levels don't automatically mean you should sit out the market entirely. Now may still be the perfect time for some to buy or refinance a home.