Pros and Cons of Buying a Home With a High Interest Rate

When a financial institution approves your mortgage application, they will offer their best possible interest rate on the loan. This is essentially the price you pay to the bank for the money. Interest rates will vary depending on your down payment, credit, and the cost of the house; however, they are also affected by macroeconomic trends. 

In late 2023, interest rates reached an average of 7.53%, which is 2% higher than a year ago and the highest average in 20 years. This is making some potential buyers rethink their plans.

If you want to become a homeowner or move in the coming months, you don’t necessarily need to fear higher interest rates. In this article, we’ll guide you through various options and discuss about strategic decisions you might need to make when buying a home. We will also share the pros and cons of high-interest rates and your options to save money.  

Pros of Buying a Home with High-Interest Rates

It’s easy to get caught up in the panic of the real estate news cycle. While interest rates are something to keep track of, they aren’t necessarily a trend that you need to fear.

Here are a few potential benefits of buying a house at this time. 

Potential for Negotiated Prices

In some cases, sellers have more to worry about when it comes to rising interest rates than buyers. Homeowners rely on a steady stream of buyers who are interested in their properties to sell in a timely manner.

If buyers decide to wait until interest rates drop, demand for houses will decrease. This means properties will stay on the market longer, sellers will receive fewer offers, and buyers can negotiate better prices. 

Housing inventory has been at a record low since the COVID-19 pandemic. With fewer houses on the market, buyers often enter bidding wars or have to make offers on houses they only visited once. There’s a chance that higher interest rates soften the market and give buyers an edge over sellers.

As a buyer, you might be able to get a house 10-15% below the listing price, which makes it much more affordable.

Less Competition

Fewer buyers in the market is stressful for sellers, but it is great news for buyers. You can take your time looking at houses and search for properties that truly meet your needs. 

When the market is packed with buyers, high-quality houses will only spend a few days on the market. If you wait 24 hours to think about a property, a seller might already have received and accepted offers on the home. In a slower market, buyers have time. You can hold out to find your dream home in an ideal neighborhood.

Possible Economic Stability

Interest rates often match levels set by the Federal Reserve, the central bank in the United States. When there are high levels of economic stability – like a recession or a global pandemic – interest rates are lowered. This is because the bank believes that fewer people can afford loans, which means they cannot buy houses. However, in times of economic stability and prosperity, interest rates increase. 

“Buying a home as mortgage interest rates are rising is nothing to fear,” says Ryan Boykin, a real estate professional with more than 14 years of experience. “From a historical standpoint, a 5% mortgage rate is still remarkably low. And a mortgage today with a fixed rate for the next 30 years is still considerably cheaper than historical comparisons.” 

You can feel confident as a buyer taking on a home loan while the Federal Reserve feels optimistic about the economic state of the nation.

Cons of Buying a Home with High-Interest Rates

While there are certainly big-picture benefits to high interest rates home buying, there are also drawbacks to this option.

The biggest concerns have to do with the direct effect of interest rates on your loan costs, monthly payments, and overall budget. 

Higher Monthly Mortgage Payment

The higher your interest rate, the more your monthly payment will be. Even small changes to your interest rate can have a big impact on how much you pay the bank over the course of your loan. 

The team at Ramsey Solutions highlighted how changing interest rates can impact home loan costs. They use the example of a $350,000 house with buyers who have a $70,000 down payment (20%).

This means the loan is $280,000. If the couple secures an interest rate of 2.3% they can expect a monthly payment of $1,841 and will pay the bank $51,337 over the course of the loan. However, if the interest rate jumps to 6.5% then their monthly payments increase to $2,439 and the buyers pay the bank $159,038 over the course of the loan.  

While this is a dramatic example, you can see how interest rate changes can impact your overall costs. 

Limited Budget

Interest rates often determine buying power. Many potential homeowners set a monthly budget for what they can afford on housing costs. If a couple’s maximum amount is a $2,000 monthly mortgage payment, their buying power decreases because of high interest rates.

They will need to look at cheaper houses because a larger percentage of their monthly payments will go to the interest charged by the bank.   

Make sure you have a clear idea of the properties you can afford before you start looking at houses. Also, consider which features are essential and which ones are optional. You might have to compromise on certain home elements so your house fits within your budget.

Difficulty in Qualifying for Loans

Buyers set their own budgets for what they are willing to pay each month, but lenders also have restrictions. A mortgage lender usually requires a debt-to-income ratio of 36% to approve a mortgage loan.

They factor in the cost of your interest rate with this calculation. When interest rates increase, it becomes harder to qualify for loans because the monthly payments set by the lenders are higher.  

There are ways to counter this. A buyer can put down a larger down payment which lowers the cost of the loan. Even if interest rates are high, the down payment reduces the total cost while also lowering the potential risks for lenders.

A down payment larger than 20% of the home’s value means you won’t have to budget for private mortgage insurance and you should get a favorable interest rate.

How to Buy a House When Interest Rates Are High?

As you review the effects of high interest rates on home buying, you can see how important it is to be strategic in the purchase process. Before you start looking at homes and falling in love with certain neighborhoods, you need a clear picture of your finances and a strategy to manage mortgage rates.

Here are a few tips on how to navigate high interest rates.

Hire a Real Estate Agent

The first step if you are worried about mortgage rates is to hire an experienced real estate agent to help you with the buying process. Realtors keep their fingers on the pulse of interest rate trends and understand the needs of their buyers. A quality agent can help you find the right house and secure a reputable lender during the buying process. 

If you aren’t sure how to find a real estate agent in your area, turn to the resources on FastExpert. You can look through Realtor profiles and learn about the specialties and experiences of specific agents. This can give you greater confidence when choosing agents to interview. 

If you are worried about high mortgage rates, make sure you hire a Realtor who makes you feel confident in your decisions. Never choose someone who will pressure you into buying a home out of your budget.

Alternate Loan Options When Interest Rates Are High

One of the best things you can do when interest rates rise is to learn more about your financing options. This way you won’t get pushed into a loan that doesn’t work for your specific needs. 

For example, a fixed-rate mortgage keeps the exact same monthly payment throughout the duration of your loan. If you have a 30-year mortgage, the payment you make next month will be the same as the one you make in 2053. This is a great option if your income increases over the years.

However, some buyers are opting for adjustable rate mortgages (ARMs) which change based on interest rate trends. When interest rates decrease, your monthly payments decrease. If you buy at a time when interest rates are high, you might have lower monthly payments in the future. 

“ARMs are coming back,” says Hagan Stone, a Realtor based in Nashville. “I tell people all the time that the rate you’re buying is flexible and that you can [refinance] that … but for the investment, now’s a great time to get a better shot and a better deal on a property.”

The drawback of ARMs is that when interest rates rise again, so will your monthly payments. Additionally, there are two other financial options you should be aware of when looking for a deal on mortgage rates.

Temporary Buydown

A buydown occurs when the buyer makes a lower monthly payment for the first year or two of homeownership. After this period, they will assume the higher monthly payments they agreed to in the loan.

Sellers often cover the savings in the temporary buydown as a way to make their homes more appealing. If you are looking at properties with eager sellers and are worried about your mortgage interest rate, consider making a buydown part of your offer.

Loan Assumption

Instead of applying for a brand new loan when buying a house, you might be able to take on an assumable mortgage. This occurs when you accept the same rate, repayment period, and principal balance of the seller’s existing mortgage.

This is an ideal option if the seller has favorable terms and the buyer can meet the same principal down payment options. Talk to your Realtor about making this part of your offers. 

Financial Planning and Budgeting

Before you start looking at houses, look at your finances and consider the type of home you can afford to buy. Not only do you need to evaluate your mortgage loan and interest rate, but you also need to factor in property taxes, home insurance costs, and monthly utility bills. 

For example, you might decide to buy a smaller home on the water with a dock for your boat. The smaller property might have lower monthly utility bills but higher insurance costs if you are required to get flood insurance.

Also, always ask your Realtor about homeowner’s association fees when looking at properties. Across the country, monthly HOA fees average between $300 to $400 per month. Even if you find a home that fits perfectly in your budget, HOA costs could push it out of your desired range.

Don’t Let Interest Rate Trends Prevent You From Buying

Buying a house is a big decision and can affect your finances for the next several years. While high mortgage rates can impact your monthly payments, investing in a property now can grow your wealth over time. Look at your current budget, housing prices in your desired area, and your financing options to see if buying right now is the best choice for you. 

If you are ready to buy, turn to the professional real estate agents at FastExpert. You can hire a trusted agent who can help you save on closing costs and work with qualified mortgage lenders. You can feel good about the buying process, regardless of the housing market in your area. Try FastExpert today and take the first steps toward becoming a homeowner.