KNOXVILLE, Tenn. — In January 2023, the Federal Reserve set the federal funds interest rate at 4.33% — raising it to the highest level it's been in 15 years.
The interest rate is one of the key tools the federal government uses to guide its monetary policy. The rate impacts everything from credit card rates to mortgage rates. Suzy Trotta, a real estate expert in Knoxville, said she thinks a higher federal rate is leading to interest rates on mortgages that are higher than what people are used to.
"The days of 3% interest rates are over. That was an anomaly. We were coming out of one of the worst housing recessions that this country has ever seen, and we got there through housing recovery. Now, we're trying to combat inflation," said Trotta. "To some extent, it's not a direct correlation."
She said that most borrowers will end up paying a 7% interest on their mortgage, instead of the 3% they may be used to — more than twice as much.
"Your payment may be almost twice what it would have been at 3%. You may be paying $3,000, whereas maybe you were paying $2,000 or less before," she said. "I think this is really important for people to remember — that what goes up must come down. Even though interest rates may not get back down to that 3%, they could very easily hit 4%, 5% or even 6%."
She said that people who take out mortgages might have the option to refinance their loans later on if mortgage interest rates fall. She also said that even though interest rates may be higher than people are used to, taking out a loan could still be better than renting for many people.
"If you're stuck in a situation where you're paying $3,000 rent anyway, buying a house may seem like, 'Why don't I just pay into a house versus paying rent?' You could refinance down the road, and it could still be a smart decision for you," she said.
She also said that adjustable-rate mortgages have also started getting more popular among borrowers.
"We haven't seen those since the '08 days, back in what I call the 'Battle Days.' It didn't happen overnight, certainly. But, we started correcting toward the middle of the year. And it really, we really started noticing it in the fall," said Trotta.
She also emphasized that while interest rates rise, competition may slow in the real estate market, which could make finding the right house easier for buyers.