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What Happens When the FED Raises Interest Rates

Interest rate increase, in economics, is known to be an anti-inflationary strategy of the FED. This is because consumers tend to increase savings or investments and reduce spending when interest rates increase. The mechanism is based on the fact that, returns from savings will be higher when interest rates increase, and thus reduce spending. At the same time, increase in interest rates will discourage borrowing. Interest rates from the FED are usually passed down to the individual borrowers.

Albuquerque Real estate, like any other commodity, can be affected by many economic indicators. Real Estate prices are proved to be really sensitive to interest rates1, especially when talking about income producing properties. One reason for this is if an interest rate shock happens in the economy, it affects the cash flow of the property. When spending decreases, total income of the economy is expected that is why inflation is countered when interest rates increase. When this happens, the owner of a property might default, and thus may result to a decrease on the price of the property.

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In buying Real Estate in Albuquerque, the immediate effect of interest rate increase is the increase in interest rates for mortgages. There will be a slight increase to the approved rates for borrowers to compensate for the FED’s interest rate increase, though there is still the option to have an adjustable rate mortgage when the FED is expected to decrease the interest rate after sometime. Refinancing is also an option to take advantage of a lower interest rate.

To know more about the changes in interest rates, you can consult with our lending partner Robert Sanchez (NMLS# 463501) from Legacy Mortgage. Robert is an NM Production Manager at Legacy Mortgage and has the necessary knowledge to help you with your loan needs.

  1. Chaney, A., & Hoesli, M. (2010). The interest rate sensitivity of real estate. Journal Of Property Research, 27(1), 61-85. doi:10.1080/09599916.2010.500815

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