Rising Interest Rates: How It Impacts Your Real Estate Investments and Financial Plan

By Published On: March 5, 2022Categories: Real Estate, Wealth Building3.8 min read
Illustration of fingers stacking a house on increasing stacks of coins.

Are you thinking about entering the real estate market? Then, we need to have a talk about rising mortgage interest rates. To many investors, this translates to increases in real estate prices – especially after the Fed projects six more rate increases this year.

But the reality is that, just like with other investment markets, there are many nuances to consider. This article will help you sort through the macroeconomic chatter to understand how rising interest rates impact your real estate investments and explore a few strategies for when you buy or sell in this type of environment.

The Current Situation

Right now, interest rates are hovering around 4%. While this is higher than the historically low twos and threes that we saw not too long ago, a 4% interest rate is still considered very low. Just take a look at Freddie Mac’s historical rates for 30-year mortgages and you’ll remember why a few years ago, we all got very excited when the rates got down to about 5%!

Having said that, it’s important to understand how rate changes affect your individual situation as a buyer, seller, or owner of rental properties.

How Interest Rates Impact Buyers

Buying a home when interest rates are higher makes your purchase more expensive. Combined with property shortages and stricter credit requirements, it’s no wonder why many investors would shy away from buying these days. But there are still opportunities to lock in a relatively low interest rate and buy your dream property today.

While today’s market may feel hyper-competitive, the opportunities are there as long as you’re prepared. It all starts with lining up a great team to help you achieve your real estate goals. With a knowledgeable financial advisor, a great lender, and an experienced realtor, you’ll be ready to make an offer when the right home comes on the market.

When talking to your team, here are some options for you to explore given today’s increasing interest rates:

  • If your cash flow allows, discuss a 15-year mortgage, which can offer a lower interest rate
  • Consider a float down rate, to protect you against rate increases during underwriting and give you the option to lower the rate in the future
  • Adjust your wish list and be ready to compromise to help you secure a great property at the best interest rate available
  • Have your financing in order, so you can move quickly when the time comes to purchase
  • Discuss with your realtor creative ways to make your offer more attractive, such as forgoing a finance contingency or shortening due diligence

How Interest Rates Impact Sellers

Because rising interest rates make purchases more expensive for homebuyers, this can have a negative effect on sellers. This is why many sellers are keen to take advantage of current rates before they continue to rise.

In addition to rising interest rates, property shortages are still a reality. With the right team by your side, you can make the most of today’s market conditions. By working with your financial advisor and realtor in tandem, you can make a profitable sale and find a new home that fits your plans for the future.

Some topics to discuss with your team include:

  • How to take advantage of the equity in your home to buy your next property
  • Running a comparative market analysis to determine the right price
  • Understanding how deferred maintenance affects the price of your home
  • Tips on preparing your property for showing, once you’ve determined a price

How Interest Rates Impact Your Real Estate Investments

If you own a rental property, rising interest rates can also impact your portfolio – even if you have a fixed mortgage rate. While your own monthly payments won’t change dramatically, rent prices do go up when rates increase. This means that you should take frequent looks at your rental portfolio and adjust your rent rates accordingly.

To take advantage of these conditions, it’s always best to work with a local expert who understands the real estate market in your area. Their analysis can help you make intelligent moves that benefit your income and your overall financial plan.

Let’s Take a Look at Your Financial and Real Estate Plan

If you would like to have a conversation about how rising rates affect your real estate portfolio and your overall financial picture, we’re here to answer your questions.  Reach out today to talk through those details and figure out what today’s interest rate changes mean for you and your financial plan.

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