Over the years, there has been a common argument that it is better to buy a home when mortgage rates are high.
The logic here is that housing prices should be minimum If the prices are high, then you get a property at a lower price.
The great thing is that if mortgage rates go down, you can get a lower interest rate too!
When it all comes together, you get the best of both worlds. A lower purchase price and a lower mortgage rate.
But is this scenario really realistic? And is there a relationship between housing prices and mortgage rates?
Buying a Home When Interest Rates Are High
On the surface, buying a home when interest rates are high seems like a very bad deal.
Ultimately, your monthly loan payments will be more expensive if the interest rate is higher.
For example, imagine you bought a $500,000 home with a 20% down payment. That means your loan amount is $400,000.
- 7% mortgage rate: $2,661.21
- 4% mortgage rate: $1,909.66
The difference in PITI payment each month is $750 is a whopping $1000.It’s not a small amount by any measure.
*You can quickly compare other monthly payments on my mortgage rate charts page.
However, this large difference in payment may make many potential home buyers ineligible for a mortgage.
Remember, you have to qualify for a home loan, so if your income doesn’t cover this big jump in payment, you may be left out altogether.
For some people, the argument for buying when interest rates are high stops there. But shouldn’t housing prices be cheaper if mortgage rates are higher?
Again, you might think this is because expensive items may reduce demand and lead to increased supply.
But if you look at history, you don’t find any strong correlation between home prices and mortgage rates.
In other words, when one goes up, the other doesn’t necessarily go down. Or vice versa. So if you’re looking for a deal, don’t expect to get one just because mortgage rates are “high.”
You will get more payment relief with a lower mortgage rate.
Another problem is that a lower purchase price does not mean a significantly lower amount paid.
For example, let’s compare buying a $500,000 home to buying a $450,000 home with a 6% mortgage rate and a 20% down payment.
- $400,000 at 6%: $2,398.20
- $360,000 at 6%: $2,158.38
In this scenario, the monthly payment is Only $240 less per monthThis is assuming you can get a home with a 10% discount.
Remember that there is no historical inverse relationship between mortgage rates and home prices.
So you may not see such a discount just because mortgage rates are high.
Instead, you may face a higher mortgage rate and a higher home price, as we’ve seen over the past few years.
This also refutes the idea that house prices rise when interest rates are low. Again, there is no clear relationship on this front.
These plans could collapse if the economy collapses and low interest rates become less beneficial to potential buyers who now face bigger issues, such as unemployment or low wages.
Your home buying decision should not be contingent on mortgage rates.
Simply put, the decision to buy a home goes far beyond the mortgage rates available.
It doesn’t matter if the 30-year fixed rate is 3% or 8%, what matters is whether you can afford the house, whether you can make steady payments over the next decade, and whether you like/want/need the house.
If you are buying based on the mortgage rate, you are either trying to time the market or you may just be making a profit.
You could face affordability issues if property taxes go up, or insurance premiums increase.
You certainly don’t want to rely on the marry-from-home, dating-at-interest strategy, which hasn’t worked out so well over the past few years.
Some people seem to think they can buy now and then refinance the price and term later to lower their payments.
But there’s no guarantee that mortgage rates will drop significantly, or that you’ll qualify when that time comes.
So instead of focusing on price, look at the big picture. Is this the right home for you? Is the price right? Can you see yourself living there for the next 5 to 10 years or more?
Does it make sense to make a financial decision based on your income, assets, and job? If yes, great, go ahead. If not, you may need to take a deeper look at the situation.
Remember, do not mistakenly assume that there is a strong relationship between rates and prices.
Should you sell your home when prices are high or low?
Again, mortgage rates are just one piece of the pie. There are many different factors to consider when buying or selling a property.
We need to look at supply and demand, housing price expectations, and the broader economy. As we noted, there is not a strong relationship between prices/rates historically.
So, if prices are low, you can’t assume that prices will rise dramatically and that this will be a great time to sell your home.
Make sure that could It may be a good time to sell if demand is high. But what if prices are falling because the economy is in a recession? Fewer potential buyers means lower prices, right?
It’s not that simple. If you’re selling a property and buying a replacement property, that’s another consideration.
Will it be easy to find a replacement? Right now, selling a home is a bit scary because inventory is so low in most places.
You may find yourself renting until a suitable property comes along. Who knows what the prices will be then?
I know several people who sold into the supposed “market rally” a few years ago in order to lock in profits.
But since then they have been unable to find a new home to buy. In the process, they have lost years of ownership and are now facing significantly higher interest rates.
In short, don’t try to determine when to buy or sell a home based on mortgage rates.
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