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How The Interest Rate Increase Will Affect You

screen-shot-2016-12-23-at-12-50-38-pmThey finally did it. After months of speculation by every financial publication across the U.S., the Federal Reserve has raised its key short-term interest rate a quarter of a percentage point. What exactly does that mean? Borrowing money just got more expensive.

It also means we will never see home loans this low again. What the Federal Reserve did to get mortgage interest rates down after the housing crisis in 2008 won’t (and can’t) be repeated. Going forward, mortgage interest rates will be set by the “market,” not by intervention from the Federal Reserve.

Interest rates have a greater effect on Oahu home buyers due to our unique situation. Low inventory, high demand and high levels of competition mean that interest rate increases won’t affect overall home prices, but they will drastically affect what you can afford.

At the risk of getting too technical, let’s focus on what this means to you.


Interest rates have the biggest impact on loan payments, much more than purchase price. The higher the interest rate on your home loan, the higher your monthly payments will be. When rates move upward, entry-level buyers (usually first-time homeowners) are affected the most. In the Oahu market, where prices also are moving upward, increases in interest rates have an even bigger impact.

Increases in interest rates will greatly affect how much you can borrow, as your loan qualification amount is based on the monthly payment you can afford.


Simply put, higher interest rates mean higher monthly payments. While you may be able to afford the down payment, it may be more difficult to qualify for a loan because of the higher monthly payments.

First-time homebuyers will feel the effects the most. Some young buyers and families don’t yet have the income level or savings to afford even a slight increase in monthly payments.


With the interest rate at a historic low, the number of buyers who qualify are at an all-time high. So as the interest rate increases, the number of buyers should decrease, thereby decreasing overall competition and prices, right? Well, no.

In some real estate markets this may be true, but on Oahu, demand is so high and the inventory of available housing so low that interest rate increases will not affect overall home prices. Rate increases may, for example, decrease the number of buyers competing for a property from five down to three, but it won’t bring prices down.

Looking at median prices and interest rates since 1977, interest rates have never had an effect on Oahu home prices. During the three “price runs” in Oahu real estate history (when properties appreciate at 15-20 percent or more per year), the interest rate was anywhere between 5 percent and 16 percent. Regardless of how high or low it got, the rate did not influence the overall median price.


Interest rates aren’t going to skyrocket overnight. However, even this small increase will make it harder for first-time homebuyers to qualify for a loan, and monthly payments will continue to increase as the interest rate does.

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