How Inflation Impacts the Real Estate Market and What You Can Do About It

There’s no question that real estate investments pose excellent opportunities for both short and long-term financial gains. So having a working knowledge of how inflation can impact real estate is vital to protecting those investments.

Today, we’ll share how inflation impacts the real estate market and what you can do about it.

So, What is Inflation?

Inflation is a general increase in the price of goods and services – our cost of living and a later fall in the purchasing value of money. These rates are measured as a percentage of change in a specific time range.

If inflation is high, then this means that each dollar you have today will be worth less tomorrow. For example, if you buy an iPhone 12 today for $500, and tomorrow I buy it for $700, then there has been an inflation rate of 25%. That means that your purchasing power has fallen by 25%. Everything is affected from the cost of groceries to an increase in our heating and gas bills and housing. 

The real estate market is a complex network in which buyers and sellers interact to reach an agreement on prices and terms.

Individuals who are interested in buying or selling properties should be aware of how inflation can affect their real estate transactions.

Impacts of Inflation on Housing

On Friday, Dec. 10, 2021, the Bureau of Labor Statistics stated that the U.S. inflation rate increased 6.8% over the previous year, the largest year-over-year rise since 1982. 

Additionally, Bankrate chief financial analyst Greg McBride expects mortgage rates to climb to 3.75 % during 2022 before falling back to 3.5 % by the end of the year. 

While the end-of-record low rates for refinancing may be gone, it looks like we may still be primed for solid home sales for the remainder of 2022. 

How can you protect yourself against inflation?

You can do several things to protect your real estate investments from rising interest rates. You can refinance your current property or lock in your rate early for your new purchase. 

By being proactive, you will be able to limit any potential negative impact of inflation and increasing mortgage rates.

Here are some actionable items to protect yourself: 

First, you can get a Fixed-rate mortgage. 

With fixed-rate mortgages, there won’t be any fluctuation in interest rates and payment amounts!

Second, you could refinance your current property.

If your current mortgage has a higher interest rate, lock in a lower rate as soon as you are able by refinancing. 

Third, lock in your rate early!

When buying a new home, the sooner you can get approved and lock in that interest rate, the better. 

Fourth, make sure you have a plan to pay off your mortgage.

With rising inflation, the increased cost of living may have skyrocketed – make sure you have a plan to pay off your mortgage.

Fifth, get a home equity line of credit.

You can use your home equity line of credit when you need to get some cash for those much-needed home improvements.

Sixth, shop around for your mortgage lender!

Lenders can offer purchasing incentives. For example, consider shopping 2-3 different lenders, this way, you get the best rate.

Lastly, if you have the option to buy down your rate, you should do that!

Having extra cash to buy down (or decrease) your interest rate can decrease the interest paid in the long run and keep your payment lower!

So, what is a fixed-rate mortgage and why should I consider it?

A fixed-rate mortgage is the best option for you if you plan to stay in your home or keep your real estate property for a long time. This interest rate is locked for the life of the loan and thereby protects you against inflation. This is important because as prices rise, they devalue the value of money in your pocket. Using a fixed-rate mortgage, your payment will stay the same no matter how much prices increase (or decrease). It’s like having an insurance policy against inflation: you can rest easy knowing that no matter what happens to rates or home values over time, your payments won’t change!

What is a variable rate mortgage? 

Also known as adjustable or floating rates – is a rate on a loan that fluctuates over time because it is based on underlying indexes, like the prime rate. When the rate and index are linked, as the index changes the lender may also change the interest rate. This can mean your monthly payment can correspondingly go up or down. 

The variable rate may stay the same from 3 to 5 years and then change periodically. 

If there is a chance that you may need to sell your home or real estate property before the term of your mortgage is up and therefore want some flexibility in terms of price increases, then consider getting a variable rate mortgage instead. 

Variable rates also come with more risk: if inflation increases (which is what is projected to happen), then your monthly payments might go up as inflation does, making it harder for you to afford them in the long term.

Inflation impacts all of us. 

In the end, there is no way around it: inflation is going to have an impact on your real estate investments. 

Consider using your home equity line of credit if you need money for home repairs. 

Make sure you have a plan to pay your mortgage payment and protect your investment. 

And finally, one of the best ways to protect yourself is by getting a fixed-rate mortgage- sooner rather than later – so that you won’t have any surprises when your loan comes due.

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