The new year has brought not only a new political administration, but also an incremental increase in central interest rates, with the Federal Reserve recently raising interest rates for only the second time in nearly ten years. This can come as great news for those who are conservatively invested (or not invested at all) and who have seen their savings account returns dwindle to near zero, but it may present a challenge for potential home buyers who could have grown complacent after years of record low rates. Those who have wanted for years to purchase a rental home may also find themselves slowly being squeezed out of their price range. Read on to learn more about how increases in interest rates can affect the home purchase process, as well as what you'll want to consider when deciding whether the purchase of rental real estate is right for you in today's climate.
How do interest rates affect home purchases?
As interest rates rise, a consumer's purchasing ability goes down, which can make it tougher to both buy and sell. For example, if a consumer can afford a mortgage payment of no more than $900 per month, he or she may be able to obtain a $190,000 mortgage at 4 percent interest (for a payment of $907 per month). However, when interest rates rise to 6 percent, that same $900 per month will only be enough for a $150,000 mortgage. Unless purchasers are able (or willing) to stretch their maximum payment, they may find themselves quickly priced out of the same homes that were safely within their price range just a year or two ago.
Is it a good time to purchase rental real estate?
While rising interest rates are rarely greeted with happiness, it's not all bad news. Although you might find yourself paying a slightly higher interest rate if you purchase now than you would have had you purchased a year or two ago, buying into a rental market while interest rates are rising can be a smart move, especially if these rates continue to rise after your purchase.
As interest rates rise and purchasing power drops, many who might otherwise buy a home could find themselves renting -- either for cost savings, for flexibility, or to provide some time to save up a larger down payment. Having a larger pool of renters from which to choose can only benefit you as a future landlord, and many of your mortgage-related expenses may be deductible. If you've been considering delving into rental real estate for some time, the recent increase in interest rates may be the precipitating factor you've been looking for.