ReSET Blog
Blog · October 05, 2022 · AUTHOR: Darwin Pelea

How to Explain the Rising Interest Rates to Clients?

Educating clients about rising interest rates is crucial for a real estate agent. This is especially true for those who are retired or close to retirement because they may be more conservative with their investments and have lower risk tolerance.

Several factors can affect interest rates, such as the Fed's monetary policy, inflation, and the economy's overall health. As interest rates rise, so do the yields on bonds. It can lead to losses in the value of bonds, which retirees often use to generate income.

It is important to let clients understand what rising interest rates mean for them and their money. To do this, you need to refresh your knowledge of the key concepts your client needs to know. 

This article will explain rising interest rates, how they are determined, and their effect on investments. We will also provide tips on adjusting investment strategies in response to rising interest rates.

What is a rising interest rate

Rising interest rates are the result of increasing inflation in the economy.

Inflation is a general rise in the prices of goods and services throughout an economy. It can be caused by various factors, such as increases in money supply, changes in fiscal policy, or a rise in demand for goods and services.

When inflation rises, each dollar you have becomes less valuable because you can buy less.

The Federal Reserve can increase the money supply by printing more money or lowering interest rates so people will borrow more money. When the Federal Reserve lowers interest rates, it makes borrowing less expensive and stimulates economic growth.

However, the Federal Reserve only raises interest rates when they believe there is too much inflation and needs to slow down the economy so that prices will not continue to increase at an unsustainable rate.

It causes problems for many people. After all, their debt payments become higher and harder to pay off because they have less disposable income after paying off their debt through high-interest rates on loans like mortgages, credit cards, and student loans.

What does a 1% increase in interest mean

While a 1% increase might not seem like a big deal, it can have an enormous impact. Let's say a person takes out a loan to buy a car worth $25,000. If the interest rate on that car loan is 2%, they will pay off $25,000 times 2%, or $5,000 total. Now, if the interest rate on that car loan is 3%, they would pay off $25,000 times 3%, or $7,500 total. That difference of $2,500 in interest adds up to a 25% increase in total costs. In contrast, this extreme example illustrates how a slight uptick in interest rates can impact your client's bottom line.

What is causing the rise in interest rates

Several factors are causing interest rates to rise.

The Federal Reserve has raised interest rates four times in 2022. The reason for this is that the economy is growing at a rapid rate, and inflation is beginning to pick up.

Inflation occurs when too much money is circulated, chasing too few goods. It causes prices to rise as people compete for those goods. If you have more money than you need, the extra money will go into investments like bonds and stocks, which will drive up their prices - which means they are now more expensive for everyone else who wants to buy them.

The increase in prices also leads to higher wages being paid by employers - because they have to compete with each other for employees, who can move on if they're not paid well enough. Higher wages mean higher taxes for businesses, which make it harder for them to compete internationally with foreign companies that don't have such high costs of labor (thus driving down their prices). It also makes imports more affordable for consumers (who can now afford more imported products), which hurts domestic producers who can't compete on price because of those high labor costs.

All of these factors combine to lead to increased inflation. And that is why the Fed is interested in raising rates now - to head off inflation before it takes hold and becomes a problem for the economy.

What Can Real Estate Agents Do to Help Their Clients

The rising interest rates challenge real estate agents and their clients. The agents have to explain the situation to their clients and help them find a solution that would work best for them. Here are some tips on how to explain the rising interest rates to your clients:

  • Keep updated on the situation: It is essential to stay updated with the latest information on rising interest rates. It will help you provide your clients with accurate information and help them make informed decisions.

  • Be prepared to explain the situation: Once you understand rising interest rates, you should be prepared to explain the situation to your clients. It includes being able to answer any questions they may have.

  • Help your clients find a solution: Once you have explained the situation, it is vital to help them find a solution that would work best for them. This may include finding a new home loan with a lower interest rate or helping them sell their current home.

  • Keep in mind that rising interest rates are not the only factor: Rising interest rates are just one of many factors that can impact your clients. It is essential to keep this in mind when helping them make decisions about their home.

  • Rising interest rates may not last forever: While rising interest rates may be a challenge for your clients now, they may not last forever. It is essential to keep this in mind when helping your clients make decisions about their homes.

  • Help your clients plan for the future: Helping your clients plan for the future is an important part of being a real estate agent. It includes helping them budget for rising interest rates and other factors that may impact their home in the future.

Rising interest rates are a challenge for real estate agents and their clients. However, by staying updated on the situation, being prepared to explain it to clients, and helping them find a solution, agents can help their clients navigate this challenging time.

How do rising interest rates impact real estate agents, and how do they do business

As we've noted, rising interest rates are causing the cost of borrowing money to go up. It means that, for the most part, clients who need loans will have to pay more to get them. While this might seem to be a bad thing for agents, it's a good thing. As mentioned above, demand for real estate is at an all-time high. As a result, home prices are rising.

It means that sellers are making more money, which means that your clients selling their homes have more cash in hand. That, in turn, means that your clients can get a more significant or less a loan for a new home. This positive result is thanks to the "rate differential." Sellers with more money can get a smaller loan for a new home because they don't need as much money to purchase it.

Agents who can get their clients a larger loan can get a larger commission. For example, a $200,000 loan with a 5% interest rate will cost $10,000 in interest over a year. If you can get a $200,000 loan with a 3% interest rate, you will pay $7,000 in interest. As a result, rising interest rates mean that your clients are likely to get more money in a higher-priced market or less in a lower-priced market, which is a net positive for real estate agents.

How clients and agents see the current situation

As agents, you have a unique perspective on rising interest rates because you have clients on both sides of the equation. Your clients who are buying houses are seeing a decrease in the amount of money they can get for a loan, which can be frustrating. While it is understandable that agents would rather see their clients get more money, this is a normal part of the process and is a good thing.

For clients who are selling their houses, on the other hand, you have a unique opportunity to help them see that lower interest rates are a positive thing because they are going to be able to get more money out of their houses.

Can clients take action to protect themselves from rising interest rates

While you can't avoid rising interest rates, you can take action to protect yourself from them. One of the best ways to do this is to get a fixed-rate loan. A fixed-rate loan has a set interest rate for the term, which means you won't have to worry about interest rates increasing your monthly payment. It is vital if you or your clients plan to finance a home.

Since home loans are often adjustable-rate mortgages or ARMs, they are more susceptible to changing interest rates. A fixed-rate loan can help ensure that loan payments don't become unaffordable as interest rates rise. Don't hesitate to contact your lender if you have any questions about rising interest rates or how they might affect you or your clients. They can help you understand the market changes and what they mean for you. Additionally, it's always a good idea to stay on top of current trends in the market so you can better prepare for what is to come.

How do rising interest rates affect mortgages?

The interest rate on mortgages increases when interest rates rise, thus making mortgages more expensive. It increases the cost of buying a home for consumers. When the price of homes increases, the demand for them decreases, resulting in a slump in the housing market, which leads sellers to lower their asking costs to attract buyers.

Do rising interest rates benefit mortgage companies?

It is good for mortgage companies/banks to earn more interest when interest rates rise. The higher the interest rate, the more interest is made by mortgage companies/banks. As a result, the bank will generate more revenues. A low-interest rate will generate a higher demand for mortgages. It will lead to a decline in loan demand, causing mortgage companies to lose business.

Is it better to have a lower interest rate or lower closing costs?

It depends on the exact numbers and whether lower closing costs or interest rates make sense. The most cost-effective option generally results in a less costly purchase in the long run. With this type of refinancing, you would typically receive a lower interest rate since you would be paying that interest rate for a long time. It would result in lower monthly payments and lower interest rates.

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