The Effect of Interest Rate Hikes on Birmingham, AL Homebuyers

Everest versus interest rates; which is the worst hike of 2022? In trail lingo, the effects of the 2020 and 2021 interest rates could be comparable to glissading down a smooth, iced-capped mountain top for many homeowners. Millions of Americans pleasantly took advantage of low interest rates by refinancing their homes. Now, we are preparing for an inevitable increase in interest rates, which for some people may feel more like planning a dreadful climb up Mount Everest. As up to six interest rate hikes are predicted to occur throughout the next two years, homebuyers could potentially end up spending tens of thousands more than they bargained for. It is of utmost importance that the 2022 homebuyer adequately understands the impact of increasing interest rates.

As American business magnate Warren Buffet once said, “Don’t pass up something that’s attractive today because you think you’ll find something better tomorrow.” The effect in which this applies to the current real estate market is magnified now more than ever. With record low interest rates in our pandemic-stricken market, the only foreseeable direction for rates to go is up.

But what does that mean for today’s homebuyers?

To answer this question, let’s discuss how these record low interest rates came about in the first place. While the Federal Reserve doesn’t directly control mortgage rates, their manipulation of short term rates directly influences long term rates. The Fed exists for two main purposes: to stabilize prices and secure maximum employment rates. The primary way to achieve these goals is through manipulating the economy with monetary support. Since 2020, the Fed has bought nearly $120 billion worth of bonds monthly in an attempt to boost our economy. While this caused interest rates to drop significantly, inflation rates, in turn, jumped to a level that hasn’t been seen in forty years. The Federal Reserve plans to counteract the increase in inflation by accelerating the removal of monetary support. Consequently, inflation rates are expected to drop and interest rates are expected to rise.

The debate concerning the presence of interest-rate hikes in 2022 is not if, but when and how many. The central bank recently released a projection of three interest-rate hikes this year with up to three more to follow in 2023. Some economists predict the first interest-rate hike will begin within the next four months, but others predict a withholding until summer. Regardless of when one first occurs, it is important to consider how an interest-rate hike will affect homebuyers.

Danielle Hale, Chief Economist at, predicts a gradual increase in mortgage rates, likely to hit 3.6% by the end of 2022. That would be a 0.92% jump from mortgage rates in 2020 (as averaged by Freddie Mac). Take a look at the chart below to see how an increase in mortgage rates can affect a homebuyer’s budget (from

As shown in the table above, a 1% difference can result in an addition of over $30,000 to the total amount of interest paid. As interest rates increase, affordability decreases. A homebuyer who could once afford a $300,000 house at 3% interest, would only be able to afford a home that costs $265,000 at 4% interest. Alternatively, homebuyers who don’t make proper adjustments are in for a shock. While the monthly payment for a $300,000 house only increases by roughly $200 from a 1% rise in the interest rate, the total repayment over the life of the mortgage increases by nearly $60,000. For this reason, it is critical to consider not only the monthly costs involved in financing but the long term costs as well.

So, whether you’re planning to climb the daunting 29,032-foot-tall Mount Everest this year, or just planning to buy a home, it is important to look out for yourself. Just like planning a mountaineering escapade, the effect that the 2022 interest-rate hikes have on an individual is predominately indicative of self-education. The expected interest-rate hikes may not be exhaustively comparable to hiking Mount Everest, but there is certainly a commonality in the necessity of planning and educating yourself. After all, “An investment in knowledge pays the best interest” (Benjamin Franklin).

Katie – Bham Realty


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