Interest rates play an important role in the valuation of your property, they cover more than one factor, i.e. capital flows, supply and demand for capital. This allows them to affect the properties on more than one level. One of those levels also being mortgage rates, which are a kind of interest rate but is also affected by a bank fee. Most real estate investors would just use the mortgage rate to determine the value of a property, instead of looking at the entire property value with the use of interest rates effects on other factors.
To help understand how these factors impact the value of your home, its best to get a basic understanding of income approach to real estate value. Normally real estate values are influenced by the supply and demand for properties in any given area and the cost of development, investors will look towards the income approach commonly.
This way they can simply look at the forecasts of the property income, coming in the form of anticipated lease payments. They then come up with the Net Operating Income, or NOI for short, by taking all the property costs, which is including the financing cost.
Then, by subtracting the capital costs, maintenance/ repair of the property and other expenses from the NOI, will end up with the Net Cash Flow (NCF). The NCF is the cash available to investors, due to fact that properties don’t retain cash, so this ends up making it the same as cash from a dividend. This allows the property to be given a value since dividends are used for valuing equity or fixed-income investments.
Mortgage rates are affected by interest rates substantially, which affects the property-level costs and thus influences the value of the property. Supply and Demand for capital and competing investments now play into the investment values because of this, causing the Federal Reserve Board to move away from monetary policy and focus more on the management of interest rates.
When the interbank exchange rates decrease, the cost of funds in reduced, thus making funds flow into the system; inversely, when the rates rise, the fund availability decreases. When it comes to real estate, these changes either will add or reduce the amount of capital available for investment, thus the supply and demand are affected by the amount of capital and the capitals cost. Meaning that the capital availability will be decreased, causing the capital providers to not lend less of a percentage of intrinsic value.
The changes in capital flows will also have direct impact on the supply and demand for the properties. With the cost of capital and capital availability affect supply, they influence the potential purchasers’ population.
While mortgage rates have a direct influence on real estate prices, it’s more rewarding as an investor to investigate the current interest rates to accurately determine a value for a property and get the most out of it.