The Illinois housing market has seen mortgage rates rise from nearly 4 percent in April of 2022 to over 6 percent today.
Rising interest rates impact the Illinois real estate market by forcing price changes. As interest rises, affordability lowers. This leaves many prospective homebuyers with limited options. No buyers means no market.
In today’s blog post, we take a closer look at what your clients should know about changing interest rates.
The biggest challenge rising interest rates pose is the amount of the monthly mortgage payments buyers will be able to afford.
A smaller monthly payment translates to a lower mortgage, and that can mean a smaller house or a less desirable location. Despite the fact that we continue to have a low inventory, a requirement that buyers reconsider what they can afford or the type and amount of loan they can accept will slow the market.
We will likely find that properties remain on the market longer, the bidding over asking price is a thing of 2021 and early 2022, and the fear of any delays requiring a payment for an interest rate lock will completely add to the stress of the transaction.
Managing Expectations and Budget
Interest rates dictate the type of mortgage a home buyer has in Illinois real estate.
Expectations play a big role in affordability. If a buyer can afford a $3,000 mortgage payment, it’s best to buy a home with a lower mortgage payment. After interest, the payment goes up. It’s best to choose a home with a mortgage payment of $2,800 or less. This way, interest is covered in that allotted $3,000.
Adjustable rate mortgages are making a comeback with the idea that interest rates will not remain at the current high levels and that a refinance to a lower interest rate will be possible in a reasonably short period of time. Refinancing, of course, requires the confluence of lower interest rates, maintenance of increase of the value of the property, and affordability of the costs for refinancing.
Real estate taxes and insurance are uncontrollable costs. Budgeting for these expenses is necessary to avoid future financial roadblocks during the buying process.
Educate Your Clients
It behooves sellers and buyers to become educated on rates and mortgages. Learning about things like amortization schedules, for example, prepares you for all future payments.
An amortization schedule works by showing buyers the complete rundown of principal and interest costs in each payment throughout the life of a loan.
For a seller, understanding the current mortgage rate average in their area is useful. If potential buyers are unable to meet the asking price because lenders are increasing interest rates, keeping prices reasonable will improve the odds.
As the market continues to evolve, the rising interest rates may force prices down. Lower prices cause buyers to return to the market with loan approvals. Loan approvals lead to success for sellers hoping for a quick close.
The Minchella & Associates Difference
With over 40 years of experience in Illinois real estate law, Erica Minchella has represented thousands of home sellers and buyers, landlords and commercial and investment property owners. For more information, schedule a consultation today.