Interest rates are back in the headlines.
On September 16, the Federal Reserve raised its target federal funds rate by 0.25%, bringing the target range to 3.75% to 4.00%. The Fed pointed to inflation that remains elevated as one of the reasons for the move.
For homeowners and buyers, the immediate reaction is usually to think about mortgage rates.
But the impact goes much further than that.
Changes in interest rates can affect everything from credit cards and home equity lines of credit to business borrowing, auto loans and savings. And in real estate, higher borrowing costs can change not only what buyers can afford, but how transactions themselves are structured.
That last part is becoming especially important.
What Did the Federal Reserve Actually Do?
The Federal Reserve does not directly set mortgage rates, credit card rates or auto loan rates.
What it does control is the federal funds rate, which is a short term interest rate that influences borrowing costs throughout the economy.
When the Fed raises this rate, borrowing generally becomes more expensive. Banks and other lenders adjust their own rates based on a combination of Fed policy, market expectations, inflation, risk and other economic factors.
The goal is usually straightforward: higher borrowing costs can slow spending and investment, which can help reduce inflation.
But that process touches consumers in a lot of different ways.
What Higher Rates Can Mean for Your Everyday Finances
Credit Cards
Most credit cards have variable interest rates. That means their rates can move as broader interest rates change.
If you carry a balance from month to month, even a relatively small change in your APR can increase the amount of interest you pay over time.
For consumers already carrying significant balances, this can make paying down debt more difficult.
Home Equity Lines of Credit
HELOCs are another area where rate changes can be felt relatively quickly.
Unlike a traditional fixed rate mortgage, many HELOCs have variable interest rates. The Consumer Financial Protection Bureau notes that HELOC payments can change from month to month as rates change.
For homeowners using their equity for renovations, investments or other expenses, that can mean a higher monthly carrying cost.
Auto and Business Financing
The relationship is not always immediate, but higher interest rates can also contribute to more expensive financing for vehicles and businesses.
For a business owner borrowing money to purchase equipment, expand operations or manage cash flow, the cost of that capital matters.
The same goes for consumers financing a vehicle.
When the cost of borrowing rises, people tend to look more carefully at what they are purchasing, how much they are borrowing and whether they should move forward at all.
Savings
There can also be a positive side.
Higher interest rates can mean better returns on certain savings accounts, money market accounts, CDs and other interest bearing products.
So while borrowers generally prefer lower rates, savers may benefit from a higher rate environment.
Then There Is Real Estate
This is where things get especially interesting.
As of September 17, the average 30 year fixed mortgage rate was 6.95%, according to Freddie Mac. One week earlier, it was 6.76%.
The Federal Reserve did not directly set that 6.95% mortgage rate. Mortgage rates are influenced by the bond market, inflation expectations, economic conditions and other factors.
But for the average homebuyer, the distinction does not change the practical problem:
The cost of financing a home is expensive.
And that can significantly change affordability.
Consider the difference between financing the same house at 4% versus somewhere around 7%. The home itself has not changed. The neighborhood has not changed. The number of bedrooms has not changed.
But the monthly payment has.
That affects purchasing power.
A buyer who could comfortably afford a certain price several years ago may not qualify for the same amount today. Others may technically qualify but decide that the monthly payment simply does not make financial sense.
Freddie Mac notes that lower mortgage rates increase purchasing power because borrowing costs are lower, while higher rates work in the opposite direction.
What Does That Mean for Sellers?
Higher borrowing costs do not automatically mean that homes stop selling.
Real estate is much more local and much more nuanced than that.
Great properties can still attract buyers. Homes can still sell quickly. Certain price points and neighborhoods can remain very competitive.
But higher financing costs can shrink the pool of potential buyers.
Some buyers decide to wait.
Others lower their price range.
Some become much more aggressive when negotiating repairs, closing costs or other concessions.
And some simply cannot make the numbers work at current rates.
That can put sellers in an interesting position.
Maybe you want to move, but you do not necessarily have to sell tomorrow.
Maybe your property has been sitting longer than expected.
Maybe you have equity and do not want to continually reduce your asking price.
Or maybe you purchased or refinanced your home several years ago and are currently sitting on an extremely favorable mortgage.
In that situation, there may be more to consider than simply asking:
“What is someone willing to pay for my house?”
Sometimes another question can be just as important:
“How could this transaction be structured?”
When the Financing Becomes Part of the Value
One of the most interesting things about today’s real estate market is that millions of homeowners secured mortgages when interest rates were considerably lower.
A homeowner may have a mortgage at 3%, 3.5% or 4% while a new buyer today could be looking at financing closer to 7%.
That existing financing can potentially become an important part of the conversation.
This is where creative real estate structures can sometimes provide options that a traditional sale cannot.
One example is a transaction commonly referred to as purchasing a property subject to the existing financing.
What Is a Subject To Transaction?
In a traditional real estate transaction, the seller’s mortgage is generally paid off at closing and the buyer obtains a new loan.
A subject to transaction works differently.
The ownership of the property transfers to the buyer, while the seller’s existing mortgage remains in place.
That means the buyer purchases the property subject to the existing loan rather than replacing that loan with a new mortgage.
This can be especially interesting when the existing mortgage has an interest rate significantly below what is currently available in the market.
Imagine a homeowner with a 3.5% mortgage.
If comparable new financing is around 7%, there can be substantial value in preserving that existing financing.
Instead of focusing entirely on negotiating the price of the property, the parties may be able to structure a transaction around the financing that is already attached to it.
In certain situations, that can create an outcome that works for both sides.
Why Would a Seller Consider Something Like This?
There is no single reason.
A seller may need to relocate.
They may own a property that has been sitting on the market.
They may want to stop dealing with repairs, tenants or maintenance.
They may have plenty of equity but are not getting the offers they expected.
Or they may simply prefer a different solution than continuing to wait for a traditional buyer.
A structured transaction can sometimes allow a buyer and seller to solve problems that cannot be solved by price alone.
That does not mean subject to is appropriate for every property or every homeowner.
Far from it.
But it does mean homeowners should understand that a traditional listing followed by a conventional mortgage is not the only way a real estate transaction can be structured.
Subject To Transactions Also Come With Important Considerations
This is an area where the details matter.
In a subject to transaction, the existing mortgage generally remains in the seller’s name. The seller remains the borrower under the original loan even though ownership of the property has transferred.
Mortgage agreements also commonly contain what is known as a due on sale clause.
Federal law generally permits lenders to enforce a contractual due on sale clause when a property securing a loan is transferred, subject to certain exceptions. A due on sale clause can allow the lender to require the remaining loan balance to be paid following a transfer.
That is why these transactions should never be treated casually.
The parties need to understand the existing loan documents, insurance requirements, title, payment servicing, legal documentation and the responsibilities that each party will have after closing.
Anyone considering this type of transaction should work with qualified real estate and legal professionals who understand the structure.
Price Is Important. Structure Can Be Important Too.
Real estate conversations often revolve around one number:
What is the house worth?
Of course that matters.
But changing interest rates are a reminder that the structure of a deal can sometimes be just as important as the purchase price.
A property with attractive existing financing may present opportunities that are not obvious when looking only at its market value.
A seller struggling to find the right conventional buyer may have options that extend beyond another price reduction.
And a transaction that does not work under traditional financing may look completely different when the parties start considering alternative structures.
That does not mean every creative structure makes sense.
It means every situation deserves to be looked at individually.
The Market Changes. Your Options Can Change With It.
Real estate markets never stand still.
Interest rates change. Buyer demand changes. Inventory changes. Lending standards change.
The approach that made perfect sense several years ago may not be the best approach today.
At Property Fling, we believe homeowners should understand the different options available to them before deciding how to sell.
Sometimes that means a traditional sale.
Sometimes it means a cash offer.
And in the right situation, it may mean exploring a more creative structure that considers the property’s existing financing, the seller’s goals and the realities of today’s market.
If you’re considering selling a property and want to explore what different options could look like, contact Property Fling and let’s take a look at your situation.
