Over the years, there’s been a popular argument that it’s better to buy a home when mortgage rates are high.
The logic is that home prices should be lower if rates are high, and thus you get a property for less.
And the cherry on top is that if/when mortgage rates fall, you can get a lower interest rate too!
When all is said and done, you basically get the best of both worlds. A lower purchase price and low mortgage rate.
But is this scenario actually reality? And do home prices and mortgage rates even have such a relationship?
Buying a Home When Interest Rates Are High
On the surface, buying a home when interest rates are high seems like a pretty bad deal.
After all, your monthly mortgage payment is going to be more expensive if the interest rate is higher.
For example, imagine a $500,000 home purchase with 20% down. That’s a $400,000 loan amount.
- 7% mortgage rate: $2,661.21
- 4% mortgage rate: $1,909.66
The difference in PITI payment each month is a whopping $750! That’s not a small amount by any measure.
*You can quickly compare other monthly payments on my mortgage rate charts page.
Anyway, this large difference in payment could make many would-be home buyers ineligible for a mortgage.
Remember, you have to qualify for a home loan, so if your income doesn’t cover that big jump in payment, you could be shut out completely.
For some, the argument to buy when rates are high stops right here. But shouldn’t home prices be cheaper if mortgage rates are higher?
Again, you would think so since expensive items might reduce demand and lead to increased supply.
But if you look at history, there isn’t a strong correlation between home prices and mortgage rates.
In other words, when one rises, the other doesn’t necessarily fall. Or vice versa. So if you’re looking for a bargain, don’t expect one simply because mortgage rates are “high.”
You’ll Get More Payment Relief with a Lower Mortgage Rate
Another issue is that a reduced purchase price doesn’t translate to much of a lower payment.
For example, let’s compare a $500,000 home purchase and $450,000 home purchase at 6% mortgage rates with 20% down.
- $400,000 @6%: $2,398.20
- $360,000 @6%: $2,158.38
In this scenario, the monthly payment is just $240 less per month. And that assumes you can get a home for 10% off.
Remember, there’s no inverse relationship historically between mortgage rates and home prices.
So you might not even see such a discount just because mortgage rates are high.
Instead, you could face both a higher mortgage rate and higher home price, as we’ve seen over the past few years.
This also debunks the idea that home prices will go up when interest rates fall. Again, no clear relationship on that front.
They could fall together if the economy tanks and lower rates become less helpful to prospective buyers now facing bigger issues, like unemployment or reduced wages.
Your Home Buying Decision Shouldn’t Be Dictated by Mortgage Rates
Simply put, a home buying decision goes well beyond available mortgage rates.
It doesn’t matter if the 30-year fixed is 3% or 8%, it matters if you can afford the home, if you can make payments consistently for the next decade, and if you love/want/need the home.
If you’re making the purchase based on the mortgage rate, you’re either trying to time the market or you’re potentially just squeaking by.
And you could face affordability issues if property taxes rise, or insurance premiums increase.
You certainly don’t want to bank on the marry the house, date the rate strategy, which hasn’t worked out great the past few years.
Some seem to think they can buy now and perform a rate and term refinance later to lower their payment.
But there’s no guarantee mortgage rates will fall by a large amount, or that you’ll qualify when that time comes.
So instead of focusing on the rate, look at the big picture. Is it the right home for you? Is the price affordable? Do you picture yourself living there for the next 5-10 years or longer?
Does it make sense financially based on your income, assets, and employment? If yes, great, proceed. If not, maybe take a harder look at the situation.
And remember not to make the false assumption that there’s a strong relationship between rates and prices.
Should You Sell Your Home When Rates 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.
One needs to study supply/demand, home price outlooks, and the wider economy. As noted, there isn’t a strong relationship between prices/rates historically.
So if rates are low, you can’t just assume prices are going to skyrocket and that it’ll be a great time to sell your home.
Sure, it could be a good time to sell if demand increases. But what if rates fall because the economy is in the dumps? Fewer prospective buyers, lower prices, right?
It’s not so simple. If you’re selling and buying a replacement property, that’s another consideration.
Will it be easy to find a replacement? At the moment, selling a home is somewhat scary because inventory is so low in most places.
You could find yourself renting until a suitable property comes along. And who knows where rates will be then?
I know several people who sold at the supposed “height of the market” a few years ago to lock in profits.
But since then haven’t been able to find a new home to purchase. In the process, they’ve missed out on years of ownership and they face significantly higher interest rates today.
Long story short, don’t try to time a home purchase or home sale based on mortgage rates.
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