How Interest Rates Hit Home Buyers And Investors Differently

May 15, 2025

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How Do Interest Rates Affect Home Buying Decisions?

Interest rates are often a hot topic in real estate discussions. For the average homebuyer, interest rates can have a significant impact on their purchasing power and monthly payments. A small increase in rates could reduce the amount they can borrow, pushing them to consider lower-priced homes or even delaying their decision to buy.

But when it comes to real estate investors, the impact is far less dramatic.

For Homebuyers: The Real Effects of Rising Rates

When interest rates rise, it can feel like a punch to the gut for prospective homebuyers. Higher rates mean higher monthly payments, which could push many buyers out of the market or force them to settle for a less desirable home. A 1% increase in the mortgage rate could increase the monthly payment by hundreds of dollars, making homes less affordable. For many, this could be the deciding factor in whether or not they can afford the home they want.

For Real Estate Investors: The Bigger Picture

For real estate investors, interest rates are more of a known factor. Here’s why:

  • Fixed-Rate Loans: Investors typically opt for fixed-rate loans, meaning their monthly mortgage payment will stay the same regardless of interest rate fluctuations.

  • Proactive Analysis: When making offers, we bake in interest rates ahead of time. We adjust our Maximum Allowable Offer (MAO) to ensure that our investment still works even if rates rise. This is part of the deal analysis process.

If interest rates go down? Great, we can refinance to lower our monthly payments and boost cash flow. If they go up? It won’t impact our existing portfolio, and we won’t be scrambling to make adjustments.

Pro Tip for Investors: Never Buy with a Variable Rate Loan

It’s crucial to never buy a long-term hold property with a variable rate loan. Why? Because rate hikes could dramatically increase your payments, squeezing your margins and possibly turning a profitable deal into a liability. Fixed-rate loans allow you to predict and lock in your expenses for the life of the loan—protecting your cash flow, regardless of interest rate fluctuations.