What risk occurs when the market interest rate rises above the locked-in rate?

Interest rate risk refers to the potential for changes in market interest rates to negatively affect the value of an investment or the cost of borrowing. When the market interest rate rises above the locked-in rate, it creates a situation where new borrowers can secure loans at these higher rates while existing loans are tied to lower, locked-in rates. This can result in a decrease in the value of fixed-income securities and can make it more challenging for borrowers to refinance or sell properties.

For instance, if an investor has a mortgage at a lower locked-in rate and market rates increase, they may find it difficult to refinance without incurring additional costs, thus affecting cash flow and investment stability. In the context of real estate, this risk is particularly pertinent, as changes in interest rates can directly impact financing costs and, consequently, property values. Understanding interest rate risk is crucial for any real estate professional as it influences investment decisions and market dynamics.