Cost of buying a home can rise or fall

Special to 318 Forum

When potential buyers look to purchase a home, one of the first things they do is to get pre-qualified for a mortgage, arrange for down payments and figure out how much house they can afford.

Interest rates can affect the property value of homes, as higher interest rates generally depress sales and make the real estate market more of a buyer’s market.

Interest rates are charged on top of the principal for the use of the money. The Federal Reserve’s prime rate determines it, and each bank then determines the range of annual percentage rates it offers. The Fed tends to raise rates when inflation is higher, and this increases the cost of debt.

Mortgage Loans

Mortgage loans come in fixed- and adjustable-rate loan packages, or there may be some hybrid combinations.

Fixed-rate mortgages have the same interest rate for the life of the loan, even if a buyer may be planning to stay in the home for less than the life of the loan. In fact, most buyers don’t stay in the house for 30 years, opting instead to move or refinance their mortgages. The National Association of Realtors reports that the average length of time spent living in a home was 15 years, up from 6.5 years in 2013.

Adjustable-rate mortgages (ARMs) are loans where the rate changes on a schedule determined by the mortgage terms. It could be every six months, once a year or even monthly. The interest rate is an index value plus a margin, rounded to the nearest eighth of a percentage point. The index value is variable, and the margin is fixed for the life of the mortgage.

Buyers looking to use an ARM should be aware that the monthly cost of their payments can increase if interest rates rise. They should ensure they can cover the full range of their potential payments.

Rates and the Housing Market

When interest rates are higher or increasing, borrowing becomes more expensive, which can slow down buying and result in a drop in home prices. When interest rates drop, the cost of buying a home drops, and demand rises, taking home prices up with it.

Lenders, when determining what interest rates to charge, consider the state of the economy and government monetary policy. They also consider credit history, income and the type and size of the loan.