What to Know About Rising Interest Rates and How They Impact Lending

The process of getting pre-approved for a mortgage is one of the most important steps for home buyers-to-be as they prepare to seal the deal. Considering all the time-consuming tasks that need to be done, all the stressors and complications that tend to arise and all the chaos of packing up and moving to a new residence, the act of home buying and selling is busy enough without having to think about things like inflation, rising interest rates and lending when trying to get a mortgage.

Alas, these are very real concerns, especially in today’s market. With much talk of rising inflation and great debate over the increased price of homes presently for sale, it’s well worth discussing the truth about rising interest rates and how they truly impact lending. After all, what causes interest rates to rise? Why are they even rising in the first place in 2022? How does this rise impact lending? And what else do home buyers need to know before they begin the journey of homeownership? Let’s break down all these questions and discuss their answers below.

What Causes Interest Rates To Rise?

If you didn’t already know, an interest rate is nothing more than the cost of borrowing money from a lender. It can also be thought of as a fee charged by a lender as a form of repayment for taking a risk and lending money to a borrower in the first place. In any regard, an interest rate is a mutually beneficial thing that allows borrowers to access funds and lenders to provide access to said funds. Naturally, though, these rates are never set in stone. They’re always changing and for several good reasons.

First and foremost, interest rates rise when the demand for money rises. The more people are borrowing, the more the interest rate will be. Conversely, the fewer people are borrowing, the less the interest rate will be. Inflation also tends to have a direct impact on interest rates. This is to compensate for the reduction of purchasing power of the dollar. Last but not least, the government can also cause interest rates to rise. If the U.S. Federal Reserve indicates that an upcoming policy decision will likely impact interest rates, it usually does exactly that.

Why Are Interest Rates Rising in 2022?

Now that you have a better understanding of what exactly causes interest rates to rise, it’s worth defining what precisely is causing rising interest rates in 2022. As to be expected, the answer isn’t simple and it at least partially has to do with the pandemic.

In the most basic terms, the U.S. Federal Reserve plans to raise its rate on short-term loans between banks and other lending institutions. As such, the cost of borrowing will likely go up across the board. (However, mortgages are not always directly tied to these kinds of increases in rates. We’ll discuss this further in the next section.) The goal of these increases is to hopefully decrease widespread inflation, effectively bringing the rising cost of living down to a more manageable rate. With the continued disruption to the supply chain and ongoing increases in consumer demand, it’s unlikely that inflation will completely disappear with these increased rates, but the Federal Reserve still wants to take a shot regardless. All in all, it boils down to this: higher demand means higher interest rates.

How Do Rising Interest Rates Impact Lending?

Today, both home prices and interest rates are way up — the highest they’ve been since May of 2019. This might not sound like that drastic of an increase, but it appears to be so when compared to the record lows seen during the height of the COVID-19 pandemic. Because a majority of home buyers must take out a mortgage to afford the purchase, rising interest rates impact lending directly — the higher the rates, the fewer people will be willing to take out a mortgage, the fewer people will be buying homes.

As rising interest rates on mortgages near four percent — compare this to last year’s 2.8 percent — there’s no doubt that lending will be directly and negatively impacted. This is because some will see rising interest rates coupled with rising home prices and decide to hold off on purchasing a home until things cool off a bit. However, this is not to suggest that home buying will suddenly just drop off completely. Because the market is being so good to sellers right now, there’s no denying that as long as homes continue to be sold for record highs, they will inherently continue to be bought. As such, lending will continue, as well — regardless of those rising interest rates.

The Bottom Line: Rising Interest Rates and How They Impact Lending

When all is said and done, rising interest rates are not the sign of a struggling economy — in truth, it’s quite the opposite. Rising interest rates translate to rising growth which translates to a stronger economy. Sure, higher interest means higher mortgage costs, but on the whole, rising interest rates are a sign of increased strength and higher growth. These are unquestionably good things, even if the thought of paying more on a loan doesn’t necessarily translate to the same kind of positive connotation for home buyers.

All in all, we understand the real estate process can be complicated. Thankfully, that’s why LemonBrew was created in the first place. We’re here to provide mortgage services to find the right home loan for you! With LemonBrew, you have the latest tech and the best advisors at your disposal from beginning to end to offer tips and be your advocates during one of the largest transactions of your life. Reach out today to further discuss rising interest rates and what they mean for your specific mortgage. Get in touch with LemonBrew today or visit LemonBrew’s website to read more about rising interest rates.