See how tariffs affect your mortgage costs

Understanding the connection between tariffs and mortgage rates can feel a bit complex, but it’s important for anyone looking to buy a home or refinance. In this post, you’ll learn how tariffs impact the economy, how that ties into mortgage rates and what it means for your wallet.

What Are Tariffs?

Tariffs are taxes imposed by a government on goods imported from other countries. The idea is pretty simple: the government wants to protect local industries by making foreign products more expensive. For example, if the U.S. Imposes a 25% tariff on steel imports, it raises the cost for companies that rely on steel, like construction firms. This can lead to higher prices for new homes and renovations.

Real-World Example

Consider a construction company that uses imported steel. If the price of steel rises due to tariffs, it might cost an additional $10,000 to build a new home. If that company decides to pass those costs onto buyers, home prices could increase. When home prices go up, it can affect overall demand in the housing market.

How Tariffs Affect Inflation

When tariffs raise the cost of goods, it can lead to inflation. Inflation means that the general level of prices for goods and services increases, reducing the purchasing power of money. If inflation rises sharply, the Federal Reserve might increase interest rates to cool down the economy.

The Fed’s Response

For example, if inflation rises to 5% due to tariffs, the Fed may respond by increasing interest rates by 0.25% to 0.50% to help manage inflation. Higher interest rates can lead to increased mortgage rates.

The Link Between Mortgage Rates and Tariffs

Mortgage rates are influenced by various factors, one of which is the state of the economy. If tariffs cause inflation, leading to higher interest rates, mortgage rates may also rise.

Historical Perspective

Looking back, during the trade wars of 2018, tariffs on various goods led to anxiety in the markets. As a result, the average 30-year fixed mortgage rate jumped from around 4.4% to nearly 5.0% in just a few months. This meant that a buyer looking at a $300,000 home could see their monthly payment increase by roughly $50.

The Current Mortgage Rate Environment

As of October 2023, mortgage rates hover around 7.5%. Factors like the ongoing geopolitical tensions and tariffs still play a role in shaping these rates. If tariffs lead to further inflation, we could see these rates rise even more.

Example Scenario

Imagine you’re looking to buy a home for $350,000 with a 30-year fixed mortgage at 7.5%. Your monthly payment would be about $2,450, not including taxes and insurance. If the rates rise to 8% due to tariffs affecting inflation, your payment would increase to approximately $2,550. That’s an extra $100 a month, or $1,200 a year.

What Can Homebuyers Do?

If you’re planning to buy a home, it’s important to stay informed about economic trends, including tariffs. Here are some tips to consider:

1. Lock in Your Rate: If you see a favorable rate, consider locking it in. Rates can change quickly based on economic news.

2. Shop Around: Don’t settle on the first mortgage offer. Different lenders may have varying rates, even a small difference can save you thousands.

3. Consider Your Budget: Use tools like our can I afford two mortgages calculator to understand what you can handle financially, especially if rates rise.

FAQ Section

1. How do tariffs directly impact my mortgage rate?

Tariffs can lead to increased inflation, which may prompt the Federal Reserve to raise interest rates. Higher interest rates can then lead to higher mortgage rates.

2. What happens if mortgage rates rise before I buy my home?

If rates rise, your monthly payments will increase. It’s a good idea to lock in a rate if you find one that fits your budget.

3. Can tariffs affect home prices?

Yes, tariffs can lead to increased costs for materials, which may drive up home prices. Higher prices can reduce the number of buyers in the market.

4. What can I do to prepare for rising mortgage rates?

Stay informed about economic trends, lock in rates when you find a good one and consider using a mortgage calculator to assess your budget.

5. Are there long-term mortgage options that might help?

Yes, you might explore options like 50-year mortgages if you’re concerned about rising rates. These can spread out payments over a longer term, though they typically come with higher overall interest costs.

Conclusion

Understanding how tariffs impact mortgage rates can help you make informed decisions. Keep an eye on economic news and don’t hesitate to lock in a rate when it’s favorable. If you’re thinking about buying or refinancing, now’s the time to get ahead of the curve. And if you have questions about specific situations, like a quit claim deed with a mortgage or a reverse mortgage on a condo, reach out to a mortgage professional for custom advice.