The Foreign Investor's Guide to U.S. Mortgage Rates

If you pay attention to Real Estate headlines, you probably see lots of news about mortgage rates: the good, the bad, and sometimes the worse. But what exactly are mortgage rates? Simply put, it’s the cost of borrowing money; mortgage rates are the interest you pay on a loan to buy a property. The percentage you pay toward your mortgage can determine how much of a profit you can make from your rental property.

Rising mortgage rates in 2024 mean buying a house is a bit more expensive compared to recent years with lower rates. Even for locals who might be more familiar with the US real estate landscape, navigating interest rates can be a complex process.

If you have questions about mortgage rates, you’re not alone. Here at Waltz, we want to make buying a U.S. investment property easy and comfortable and understanding mortgage rates is a big part of that. 

Keep reading to learn more about what influences mortgage rates and why you shouldn’t be scared to buy if you’re in the market during an interest rate upswing. 

A Quick Look at Interest Rates Over Time

The interest rate on a mortgage is like the price tag on a rental car. The higher the price tag, the more expensive it is to rent the car. The same goes for mortgage interest rates – the higher the rate, the more expensive it is to borrow money to buy a U.S. property.

Mortgage rates aren't fixed; they change all the time, influenced by things happening in the economy, just like the price of gas might change depending on the world's oil supply. In general, the lower the mortgage rate, the better it is for you, the buyer. That being said, it’s hard to pinpoint or even aim for an ideal rate, because so many different factors impact it. 

The past few decades have seen some wild swings in mortgage rates. In the 1980s, the economy was booming, but prices were also going up fast due to inflation. This made it very expensive to borrow money, and mortgage rates shot up to a whopping 16%! As a result, purchasing a house became extremely challenging for many individuals.

In the decades following the 1980s, mortgage rates generally trended downwards, reflecting a more stable economy and Federal Reserve policies aimed at keeping interest rates low. This shift, along with rising wages, made homeownership more attainable for many Americans.

Then, in the early 2020s, things were completely different. Because of the pandemic, the economy slowed down, and mortgage rates plunged to record lows, even below 3%! This made it a great time for many people to buy houses because borrowing money was so cheap.

Now, things are changing again. As the economy recovers, mortgage rates are going back up, hovering around 7%. This means it's getting more expensive to borrow money to buy property in 2024 compared to the past few years.

Understanding the Forces at Play

Several factors affect how much you pay in interest on your mortgage, like economic health, global events, and more. But the one key player is the Federal Reserve (commonly known as the Fed). The Fed acts like the central bank for the US, and it can influence borrowing costs throughout the economy.

Here's how it works: When inflation, which is the general rise in prices, gets too high, the Fed raises a key interest rate it controls. This rate, called the federal funds rate, is the rate banks charge each other for very short-term loans.

By increasing the federal funds rate, the Fed makes borrowing more expensive overall. This includes mortgages. As a result, people and businesses are typically less likely to borrow money, and might choose to save more instead.

In short, the Fed raises rates to slow down a rapidly growing economy and keep inflation in check. It's like tapping on the brakes to prevent the economy from overheating and potentially crashing later.

While the Fed is the main driver of mortgage rates, other factors can also affect them. These can include: 

• Economic health: When the economy is doing well, people are more likely to have jobs and be able to repay loans. This makes lenders more relaxed and willing to offer loans with lower interest rates. On the flip side, when the economy is struggling, there's a higher chance of people losing their jobs and being unable to repay their loans. This makes lenders nervous, so they might charge more interest to make up for the risk.
• Global events: Big world events like wars or disasters can create uncertainty, making lenders wary and, therefore, potentially raising interest rates.
• The bond market: This is a marketplace where governments and companies can borrow money by issuing bonds. Bonds are essentially IOUs, promising to repay the loan with interest over a set time. If governments and companies offer high interest rates on these bonds, it can make mortgages a little less attractive to lenders. This can cause mortgage rates to rise slightly.

How Interest Rates Impact You

Mortgage interest rates directly affect how much you pay toward your mortgage each month. With a higher interest rate, a larger portion of your rental income goes towards paying the interest on your mortgage. This reduces your net income (profit) and can impact your cash flow (available money).

On the other hand, a lower interest rate means you pay less interest on your mortgage. This frees up more of your rental income, increasing your net income and cash flow. This extra money can be used to improve the property, build your savings, or simply grow your bank account.

But remember, interest rates are just one factor in owning an investment property. The total cost of owning the house is important too. This includes things like property taxes, insurance, repairs, and any time the place might be empty (vacancy periods). By considering all these costs, you can understand how much money the property can potentially make you, and how interest rates might affect your overall profit.

Why High-Interest Rates Shouldn’t Derail Your Investment Dreams

Don't let rising interest rates derail your long-term investment goals. At Waltz, we take a strategic approach, viewing higher rates as a potential buying opportunity. Here's why:

• While higher interest rates may impact your initial monthly payment, many mortgages allow for refinancing later on, when rates become more favorable. This flexibility provides the chance to lower your long-term borrowing costs and potentially increase your cash flow. Plus, with higher interest rates, there's typically less competition from other buyers. This can make it easier to negotiate a better purchase price, potentially offsetting some of the impact of the higher mortgage rate.
• Real estate is a long-term investment. Property values tend to appreciate over time, potentially offsetting the impact of higher interest rates. Owning a tangible asset provides stability and potential for future capital gains when you eventually sell.
• Even with higher interest rates, your rental income should still cover your mortgage payment and other expenses, leaving you with a positive cash flow. Remember, during periods of high rates, rental rates often rise as well, helping to offset the increased mortgage payment. The Waltz team will guide you in evaluating properties to ensure they're strong investment options with a positive cash flow potential.
• Mortgage interest payments and some property taxes are often tax-deductible in the U.S., reducing your overall tax liability.

Navigate Interest Rate Changes with Waltz

Do fluctuating mortgage rates make you wonder if it's the right time to invest? Don’t worry – high mortgage rates don’t need to spell the end of your U.S. investment dreams. With a well-defined strategy, a strong financial foundation, and the right partner by your side, you can navigate the mortgage maze and unlock the potential of the USA property market. 

At Waltz, we believe high-interest rates shouldn't be a roadblock to your investment goals. We offer competitive mortgage rates specifically designed for foreign nationals, helping you secure financing at attractive terms.

Ready to take the next step toward U.S. property ownership? Contact Waltz today for a free consultation and get expert guidance on navigating the mortgage process!