The Impact of Interest Rates on Home Buying

Since 2021’s conclusion, mortgage interest rates have risen by over two percentage points, to 5.10 percent as of April 28, 2022. And the impact of interest rates on home buying has been quite strong.

“Interest rates do affect new buyers’ perception of their ability to buy but they seem to be adjusting to the increases and coming out this spring with a renewed interest to proceed to a purchase.” says Joan Brothers, President of Manhattan Boutique Real Estate.

The annual payment on a $300,000 home has increased by 27 percent to $1,629 from $1,283 at the end of 2021. Some of the aftereffects of this will be discussed below.

When home prices are already relatively high and continue to rise rapidly, high mortgage rates just make the situation worse for potential buyers. In the following months, higher interest rates could lead home price growth to slow to below-normal levels. We anticipate a decrease from the nearly 20% annual increase seen in the prior year but still expect it to be above the more than 45-year average of 5.1 percent.

Rising interest rates have a chilling effect on the housing market

When it comes to the impact of interest rates on home buying, we know that mortgage rates have historically gone hand in hand with home prices. But this correlation ignores how quick interest rate increases affect home price appreciation. Since 1976, mortgage rates in the United States have been on the decline, with only a handful of years seeing increases of more than 1.5 percentage points annually. Interest rates increased considerably from September 1979 to March 1982 and from September 1994 to February 1995. So what can we expect from rising interest rates nowadays?

The rate at which property values increased slowed considerably over these periods. The annual rate of increase in property prices slowed to 1.1 percent from September 1979 to March 1982. And between September 1994 and February 1995, it went down from 3.2 percent to 2.6 percent. Although nominal home prices did fall during each era’s recession, real home price appreciation (appreciation adjusted for inflation) was always positive. But not only have the buying costs gotten higher. Even renting has never been this expensive. So it’s important to find the best prices possible as soon as possible.

Housing Market Response to Interest Rate Changes

Since interest rates influence buyers and sellers, they significantly impact the real estate market. The increased demand for real estate that could arise from low borrowing rates could drive prices even higher and spark bidding wars. On the other side, high-interest rates may dampen demand, leading to cheaper goods and longer market times. So if you are buying and need to move, know that experts can handle your instrument if you need help moving bulky instruments like pianos.

The impact of interest rates on home buying is evident in recent statistics. Existing house sales in May 2021 were down 0.9% from April, as mortgage rates increased, according to National Association of Realtors (NAR) data. Despite this, home sales are still significantly higher than a year ago, a sign of sustained market interest. Will the housing market do something about the rising interest rates?

The Risks of Historically Low-Interest Rates

Despite the fact that low mortgage rates can make houses more reasonably priced and enhance demand, there are several dangers to watch out for. A housing bubble could form if low-interest rates fuel rising house prices. Foreclosures and economic turbulence could result from an unanticipated rise in interest rates, which could leave homeowners unable to pay their mortgages. So while there are risks, be sure to make use of low-interest rates before they skyrocket.

In addition, when interest rates are low, people may be tempted to engage in riskier activities like taking on large debts they may not be able to repay. For instance, many homeowners in the late 2000s housing crisis took out adjustable-rate mortgages at low-interest rates. Still, they defaulted when their incomes stopped keeping up with the increased loan payments. Does this risk still exist nowadays?

Refinancing and the Role of Interest Rates

Changing interest rates might be a factor in deciding whether or not to refinance a home. To reduce monthly payments and save money in the long run, many people refinance their mortgages in favor of new loans with lower interest rates. That’s why, in such times, experts from Movers Not Shakers NYC recommend deciding what to do and hiring movers for help if you need it before the demand gets too high.

Homeowners may find refinancing attractive during periods of historically low-interest rates. Statistics from the Mortgage Bankers Association show that as interest rates have dropped to record lows, refinancing activity has skyrocketed in recent years, especially in 2020.

When deciding whether or not to refinance, it is important to weigh the pros and cons. The accumulation of closing costs and other fees may nullify potential cost savings from refinancing. Furthermore, homeowners whose home value has dropped or who have poor credit may find it impossible to refinance.

Home Equity and Interest Rates

When a mortgage is subtracted from the value of a home, the remaining amount represents the homeowner’s equity. Equity in a property can be accumulated through diligent mortgage payments or through an increase in the property’s market value.

Value changes due to changes in interest rates could reduce a homeowner’s equity position. Low borrowing rates typically lead to rising home prices, boosting equity. High-interest rates can cause a decline in property values, which can eat away at a homeowner’s equity. Some of this info can even signal good news for real estate markets. But it’s never bad to be careful and find something for a low price in advance.

Many people use their home’s equity for major renovations, paying off debt, or financing their children’s education. Borrowing against equity is possible through home equity loans and home equity lines of credit (HELOCs). These choices can be attractive, but they come with significant dangers, which include taking on more debt and losing the house if payments are missed.


The impact of interest rates on home buying can be more than you thought, and all parties are affected. Interest rates can have a significant effect on the value of a home. Lower rates encourage demand, and higher rates discourage buyers especially. Since both refinancing and tapping equity involve taking on additional debt, homeowners should think carefully about the pros and cons of each option before making a final decision. If homeowners stay abreast of changes in interest rates and the economy, they will be better equipped to make informed decisions and confidently navigate the housing market.

Photo by Karolina Grabowska,

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