COLUMBUS, Ohio (WCMH) — Inflation is the highest in 40 years, leading to increased mortgage rates at around 4.5% to 5%. Prospective homebuyers navigating this market will have their finances affected and might be wondering why the federal bank is making it harder for them to borrow money. 

To combat consumer prices increasing 9.1%, a four-decade peak, the Federal Reserve increased the benchmark interest rate range by 75 basis points or 0.75%. 

The fluctuation has made real estate particularly tough in Columbus, which is ranked among the top 10 U.S. cities where homes sell the fastest. For those looking to understand the nuances of buying in this market, Columbus Realtors President Sue Van Woerkom breaks down rising interest rates and how they can work for and against homebuyers. 

What is an interest rate? 

“An interest rate is the cost of borrowing money,” Van Woerkom said. “It costs a little more to borrow money right now, which means it costs a little more to buy a house, and that slows down the market a little bit. But, it’s not necessarily all bad.” 

Interest rates go beyond mortgages, including car loans, student loans, and credit cards. Regardless, these increases directly impact what buyers can afford, meaning what was in a buyer’s budget several months ago may not be in their budget now. 

For example, Van Woerkom said she recently worked with a homebuyer searching for properties priced at $500,000. However, the buyers were not comfortable with the interest rates for homes in that price range and needed to begin searching for properties priced at $400,000. 

Why have interest rates increased? How do they affect you?

The Federal Reserve raises interest rates during high inflation to slow down the economy and bring prices down. When inflation is too low, the reserve may lower interest rates to stimulate the economy. While initially viewed as a negative development, Van Woerkom said there is a silver lining as increased rates can give some buyers the breathing room to enter the market. 

Before the summer, interest rates were lower, leading to more buyers in the market and a lot more competition, said Van Woerkom. To be competitive, buyers had to go above and beyond to please sellers, including offering larger down payments and appraisal gaps. 

The higher interest rates have cooled down the market because many individuals can’t afford the current rates. The tactic is working as mortgage applications are down 15%, according to the Mortgage Bankers Association

“Every percentage point that interest rates go up, it squeezes about 10% of the buyers out of the market,” Van Woerkom said. 

Homebuyers may still experience competition and face multiple offers on the same property. However, the average number of competing bids has significantly decreased, said Van Woerkom. During a period of lower rates earlier this year, Van Woerkom said she worked with a property that received 42 offers. Now, properties are averaging two to three offers. 

The same trend is seen in the number of home showings. Van Woerkom was seeing 40 to 50 showings in a single weekend. Now, she deals with about nine or 10. 

So, is now a good time to buy? 

Due to decreased competition, Van Woerkom says now is a great time to buy. In addition, while rates have increased, Van Woerkom says there have been periods where rates have been much higher, around 12 to 18%, compared to the current rates of about 4.5 to 5%. 

Whenever buyers decide to enter the market, Van Woerkom encourages them to have good people in their corner, including a trusted lender and realtor. 

“You’re playing with probably the largest financial decision you make in your life,” said Van Woerkom. “Surround yourself with good people to help you make that decision.”