Buying a Home When Interest Rates Are High

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It’s easy to feel nervous about buying a home when interest rates are trending upwards. 

Should I buy now, or wait? Just how high of a rate can I accept before homes in my price range are unaffordable?

The best thing you can do to ease your fears is to pay less attention to what financial analysts on Wall Street say and crunch your own numbers. If you have good to excellent credit and are actively taking steps to get your finances in order, you can buy with confidence. 

In this article, AgentStory will help you understand a high-interest rate environment and prepare to become a homeowner.

Interest Rate Considerations

Anytime you take out a mortgage loan, you are responsible for paying interest. Interest is simply the cost of borrowing money to own a property. Remember that the interest rate applies only to the mortgage itself, and not your taxes, maintenance, repairs, and HOA fees, so make sure to factor in all of your costs when you think about house affordability.

Affects Short- and Long-Term Costs

Wish you could banish interest rates out of existence? That would be nice. When viewed in the context of your total amortization period, interest rates have a significant impact on the true cost of your home. Let’s compare how a small 2% increase in your interest rate can affect both your monthly payments and the total amount you’ll pay the bank

Math Example 1:

Imagine you wanted to buy a house for $300k with 20% down for a 30-year term. You receive a mortgage with a fixed interest rate of 12%. You’d end up owing a total amount of $648,721.28 in interest and your monthly payment would be $2,468.67 on the home.

Down Payment$60,000.00
Principal$240,000.00
Extra Payments$0.00
Interest$648,721.28
Taxes, PMI, Insurance & Fees$0.00

Total of all Payments: $948,721.28

Source: U.S. Mortgage Calculator

Math Example 2:

Then, imagine that all of your parameters were the same except that your mortgage lender gave you a fixed interest rate of 10% instead. You’d pay $518,221.84 in interest over the life of the loan and your monthly payment would be $2,106.17. This means that you’d pay $130,499.44 less total interest with a monthly payment reduced by $362.50 to own the home! The example highlights the point that 2% of interest can make a big difference in your short- and long-term costs. 

Down Payment   $60,000.00
Principal$240,000.00
Extra Payments$0.00
Interest$518,221.84
Taxes, PMI, Insurance & Fees$0.00

Total of all Payments: $818,221.84

Source: U.S. Mortgage Calculator

Pro-Tip: The U.S. Mortgage Calculator will help you determine your taxes, HOA fees, maintenance costs, and extra payments as well as your mortgage payments. It’s a good site to bookmark in your browser.

Rates Will Fluctuate 

One thing you can count on is that rates fluctuate daily from institution to institution and your financial circumstances greatly impact the rate you’ll receive. According to Bankrate, someone with a credit score of 639 can expect to pay $63,000 more for a 30-year fixed loan of $200,000 when compared to a person with a credit score of 850. While a 2% increase in an interest rate is significant, you can feel confident that minute increases of less than half a percentage point will keep your costs roughly the same. 

Should I Buy if Interest Rates Are High? 

Yes. You should buy the home if it’s within your budget and you like the house. If your dream home comes in under budget, then buying a house makes sense. When you examine typical buyer behavior in a high-interest rate environment, fewer buyers will want to take on a mortgage loan. Usually, the Fed raises interest rates when the economy is booming, but people may be more inclined to pay down debt and not accumulate new debt. Save as much as you can for your down payment to reduce the amount of interest you’ll pay.

What Are the Consequences of Waiting To Buy?

It would be prudent to wait on a home purchase if you’re still saving up for a down payment or in a tough seller’s market. After all, you want every dollar going towards an affordable home (because having money for the fun stuff is important, too!). There are a few negatives when you wait to buy a house: 

  • It will take you longer to build up equity in your home. Generally, the value of your home will increase, and living a debt-free life will help you build wealth over time. 
  • Another consideration is that with rising house prices, they may continue to rise over the years and you will eventually get priced out of your city or state. Add a high-interest rate on top of a high house price and it makes it extremely unaffordable for an average person or family to buy a home. 
  • Finally, your quality of life may be lower if you delay homeownership. Maybe you need more space than your apartment affords for a hobby or your growing family. Getting into a home sooner can help you move to a more desirable location, too.

Mortgage Tips

  1. When you apply for a mortgage, ask for a fixed-rate mortgage. You’ll have the advantage of knowing exactly how much interest you will pay monthly and over the life of the loan.
  2. If you can afford to pay extra on your mortgage, it helps you pay down the interest portion of your home faster, lowers your risk of default, and helps you gain more equity in your home. In a high-interest rate environment, this will save you a significant amount of money!
  3. You don’t have to borrow the entire amount you’re approved for. You should have a rough idea of how much you plan to borrow before meeting with a lender for the first time. The cheaper the home you buy, the less interest you’ll have to pay. 

The Bottom Line

Home buyers who take the time to understand how their interest rate impacts their wallets will have the confidence to move forward with a home purchase. Online calculators make short work of the math required, and they can motivate future homeowners to save as much as possible so that they can reduce the true amount that they will pay on a home loan. 

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