Understanding how Interest Rates Affect the Price of Your Lincoln Park Home

Understanding how Interest Rates Affect the Price of Your Lincoln Park Home

  • Shrake Group
  • 05/4/23

From young professionals to established families, Lincoln Park is an attractive community that draws a diverse array of homeowners. Bordering Lake Michigan and providing a distinct, urban vibe, Lincoln Park is considered one of the premier neighborhoods in Chicago. With its superb restaurants and shopping, a variety of cultural and entertainment opportunities, and easy access to beaches and outdoor activities, living in Lincoln Park offers a dynamic experience for all types of lifestyles. 

If you are interested in buying or selling Lincoln Park real estate, it is essential to understand how interest rates affect the price of your Lincoln Park home. Two of the most significant factors that affect the home buying process are home prices and interest rates. Of course, these two factors are inextricably linked.

How are interest rates determined?

The interest rate is set by a nation's central bank. Because inflation increases the cost of debt, central banks will often raise interest rates during a period of inflation in order to slow down consumer demand and discourage borrowing. Banks will use the interest rate to determine the annual percentage rate (APR) ranges that they will charge on a mortgage. 

Signs that rates may decrease include the stock market faltering, there are insecurities in foreign markets, inflation slowing down, and increases in unemployment. Conversely, some signs that mortgage rates may increase include a strong stock market, increased inflation, jobs increasing, and low unemployment. 

How does the interest rate affect your mortgage?

The housing market is impacted by interest rates for a variety of reasons. Your interest rate determines how much you will end up paying when you borrow the money. They also influence the value of real estate because as interest rates fall, demand for mortgages will rise to buy property. When there is a strong demand for housing, especially combined with low inventory in the housing market, it will drive up the price of housing. When conditions create a seller's market, sellers may receive multiple offers, and buyers will have to compete for the best houses. On the other hand, when interest rates rise, you will see the opposite. Demand for housing will go down, and prices will follow.

You can use a mortgage calculator to look at different scenarios. By inputting the cost of the home and your down payment amount, as well as the interest rate, you can get an estimate for your monthly mortgage payment. Playing with the numbers will give you an idea of how your mortgage payment will fluctuate based on the cost of housing and interest rates. Doing the math will help you determine if it is more beneficial to have a lower interest rate or lower closing costs. You will be paying the interest rate over a lengthy period of time if you do not refinance your mortgage. In most cases, a lower interest rate will yield lower monthly payments, less interest paid on the mortgage, and a lower overall cost. Of course, this will also vary depending on the type of interest rate you have on your mortgage. 

Fixed-interest rates mortgages

A fixed-rate mortgage means the interest rate is fixed for the entire life of the mortgage. The only way it would change is if you refinance, which is a common scenario for homeowners when interest rates drop. 

Adjustable-rate mortgages

When a home loan uses a variable interest rate, it is called an adjustable-rate mortgage (ARM). An adjustable-rate mortgage has an interest rate that is fixed for a specific period of time. Then, the interest rate that is applied to the remaining balance resets periodically and is based on an index and an adjustable-rate mortgage margin. The interval at which it resets varies and could be yearly or monthly. 

Should you take out a fixed-rate or adjustable-rate mortgage?

There is no one correct answer to this question. For example, interest rates are currently high and expected to fall, and an adjustable-rate mortgage might be in your best interest. However, if interest rates are stable or predicted to climb, and you prefer a predictable payment, then a fixed-rate mortgage is likely to be the better option. 

Tips for securing a better mortgage interest rate

Aside from watching market trends and waiting for interest rates to drop, there are other ways to secure a lower mortgage interest rate as a buyer. The interest rate is just one component of the annual percentage rate that the lender will charge. The APR also includes broker fees and other costs; each lender will charge different fees. Your own financial situation is a significant factor in determining your APR as well. 

Monitor your credit reports

Your credit score is a critical element that significantly affects your mortgage interest rates: the higher your credit score, the lower your interest rate. A lower interest rate means you will pay less in interest and more on the principal in a shorter amount of time than someone who borrows the same amount of money with a slightly higher interest rate, allowing you to build equity more quickly.

Your credit report is a reflection of your financial history and, in essence, your level of financial dependability. Lenders will look at your credit report for signs of problems repaying debt, income to debt ratios, and other factors that can affect your ability to repay your loan. Therefore, it is a good idea to get ahead by checking your credit report for errors, issues, or discrepancies.

You can check your credit report with all three major bureaus (Experian, Equifax, and TransUnion) for free. Reviewing your credit report may be particularly important for anyone who has recently had changes in their financial situation, such as paying off other significant debt, going through a divorce, etc. Filing disputes and clearing up any issues can make enough difference to raise your credit score and decrease your interest. 

Lower your debt

Existing debt is one of the elements of your credit report that is factored into your mortgage consideration. Lenders look closely at your debt-to-income ratio to determine if you can afford to repay the loan. Debt-to-income ratio (DTI) is calculated by dividing your monthly debt payments by your gross monthly income. Additionally, carrying less debt can potentially help raise your credit score. Your DTI is not factored into your credit scoring, but credit utilization is considered. The general guideline is to use less than 30% of your available credit, but the less you use, the better. 

Increase your down payment

Not only does a higher down payment reduce the amount you need to borrow, but the more of your own money you are willing to invest upfront into the property, the less risky you will appear to be to lenders. They may be able to offer you a better interest rate. 

Check out multiple lenders

While you can check with multiple lenders to assess your options for the best interest rates, you can also opt to go through a mortgage broker. Allowing the broker to do the loan shopping for you will save time. In addition, brokers have a vast array of professional connections and can often find lower rates, so using a broker can ensure you get an even better rate.

Take out a shorter loan

Although many consider the 30-year loan, you can also consider taking out a 15-year loan. The interest rate on a 15-year loan will typically be lower. Although you can also consider an adjustable-rate mortgage, and you may get a lower introductory rate than you would get for a fixed rate, there is still a risk involved. You cannot predict what interest rates will be when your ARM introductory period ends or if you will be able to refinance or sell at that time so it could be more expensive in the end. 

Consider paying discount points

It is possible to reduce your mortgage interest rate by paying discount points at closing. One point equals 1% of the loan amount. You will pay more upfront and decrease your monthly payment, but you can save over the course of the loan if you intend to keep your mortgage for more than a few years. If you sell or refinance too early, you may not recoup the upfront cost of the discount points. Buying points does not build equity in the home any sooner, but it can be a good idea if you want to lower the monthly interest cost, have extra money to put towards the home purchase and want the tax deduction, or your credit score is not high enough to qualify you for the best available rates. 

Explore Lincoln Park homes for sale with expert help

If you are ready to buy or sell Lincoln Park real estate, contact Shrake Group today. The client-centered team of dedicated brokers delivers superior results throughout Lincoln Park and the surrounding communities. Whether you are interested in selling your home or exploring Lincoln Park homes for sale, Shrake Group real estate team will help you understand how interest rates affect home prices and how to get the best deal possible. They will advocate for you every step of the way.

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