How Interest Rates Affect the Housing Market

Interest rates in the United States are determined by a range of factors, such as the actions of their U.S. Federal Reserve, the health of the market and the rate at which individuals are saving money. Given that many home sales are financed via the borrowing of money in the kind of mortgages, the housing industry is profoundly affected by modifications to these prices.


Interest rates are the prices at which money could be borrowed for a predetermined time period. The higher the rate, the more money a borrower needs to pay in the kind of interest on your loan. The U.S. Federal Reserve sets a rate at which it lends money to banks and other financial institutions, which in turn affects the rate at which they contribute to individuals and businesses, such as people looking for a mortgage.


Generally, when the rate of interest is lower, individuals are more likely to borrow money, as doing so will cost them less than at another time. Conversely, when the rate of interest is greater, borrowing becomes even more expensive and slows. This principle applies to loans which come in the kind of mortgages. When interest rates are reduced, people are typically more willing to take a mortgage out than when prices are higher.


When mortgage rates are reduced, this makes the purchasing of a home cheaper. Consequently, the sales of houses grow as more customers are able to take a low-cost loan. Consumers using existing mortgages may try to borrow their mortgage, meaning they trade their present loan for another, more economical one. In periods of low interest rates, more houses are often built as demand rises, and growth businesses are able to borrow money at a cheaper rate to finance the construction.


Even though the cost of mortgages is closely tied to the rate of interest, the cost at which houses are offered does not always appear in direct value. While low interest rates can raise demand for houses, pushing up the prices of houses, if the price gets too high, demand may cool, causing house prices to plummet.

Adjustable-Rate Mortgages

Not all mortgage rates are fixed at the time that the loan has been taken out. Having an adjustable-rate mortgage, the interest rate of the loan fluctuates with prevailing interest rates and might change as often as monthly. Most adjustable-rate mortgages have their own rates tied to an index of financial securities, one which changes with the motion of the market. During the financial meltdown of 2008, many homeowners faced foreclosure because the prices on their mortgages rose abruptly and they couldn’t make their payments.

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