Regarding the purchase and possession of a house, two key variables have an impact on the quantity you spend on your mortgage: house prices and interest rates. Although housing prices are the most obvious factor determining how much you pay for the duration of the duration of your loan, interest rates also play a crucial role in the total cost of your mortgage.
This leads to an essential question for house buyers: is it better to buy a cheaper house with a higher interest rate or a more expensive house with a lower interest rate? Let’s take advantage of mathematics and your options so that you can sail in your next house purchase with a greater feeling of financial confidence.
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Find out more: How to obtain the lowest mortgage rates
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Deciding the priority at a low interest price of houses or a mortgage interest rate is more than just a mathematical question. Indeed, there is a tendency to have an opposite correlation between the prices of houses and interest rates on the housing market. More specifically, house prices tend to be lower when interest rates are higher and house prices generally increase when interest rates are low.
This relationship implies the economic principle of supply and demand. In this case, interest rates can affect the demand for houses on the housing market. The drop in interest rates generally means an increase in demand for houses, which leads to sellers of houses to set higher prices of houses. On the other hand, higher interest rates can reduce the demand for houses, so house sellers reduce their prices to attract potential buyers and the value of houses decreases.
What is so interesting about the current housing market is that we have found high interest rates and high prices of houses – not to mention a certain economic uncertainty concerning the economy and inflation. It should therefore be noted that each financial rule has its exceptions, because we are currently living in a time when the exception has become the rule.
Learn more: When will housing prices drop?
The calculation of the affordability of a house depends on three things: your deposit, your monthly mortgage payment and the cost of the property of the mortgage.
Conventional loans require a deposit. If you wish to avoid paying private mortgage insurance (PMI), you will have to drop at least 20%, although some mortgage lenders can accept as little as 3%. In 2024, the median deposit on a house in the United States was 18%, according to the National Association of Realtors (NAR).
If you buy a house at a lower price but a higher interest rate, your deposit will probably become more affordable. For example, let’s say you buy a house of $ 220,000 while interest rates are high. You can suppress a deposit of 20%, or $ 44,000, and obtain a fixed rate mortgage of 30 years with an interest rate of 6.75%.
But if you were waiting for interest rates to drop before buying a house, the same house can sell $ 300,000. Although mortgages at 30 years can have lower interest rates, you would now need $ 60,000 to deposit 20% and avoid PMI.
Learn more: How many houses can I afford? Use the Yahoo Finance’s Affairs Affordability at Home.
Your monthly mortgage payment depends on several factors, including the quantity you are using and the interest rate on your loan. For a house purchase of $ 220,000 with a deposit of $ 44,000 (20%) and an interest rate of 6.75%, your monthly payment to the main mortgage and interest will be around $ 1,142.
If you wait for rates to fall at 5.75% and buy the house for $ 300,000, you must find an additional $ 16,000 to deposit $ 60,000. If you can afford a higher deposit, your monthly mortgage will be around $ 1,400 – just over $ 250 more per month than if you bought the house at a lower price and a higher interest rate.
However, say that a deposit of $ 60,000 is a bit out of reach. If you buy the house at $ 300,000 with a deposit of $ 44,000, you will be on the hook for PMI until you have accumulated at least 20% equity at home. If you pay 0.5% in PMI each year, your monthly mortgage payments for the principal, interest and PMI will be around $ 1,619 for the first 52 months. At this point, you will have accumulated 20% equity and you can apply to abandon your PMI. Then, your monthly payment will fall to $ 1,494 for the length of the loan. In this case, the expectation of the drop in rates will result in a monthly payment from $ 352 to $ 476 than if you had bought the cheaper house at a higher interest rate.
Note: These monthly mortgage payments do not include home insurance, property tax or the contributions of the Association of Owners (HOA). To obtain even more precise figures, Use the Yahoo Finance mortgage calculator.
Interest rate, house prices, deposit, PMI – all these individual factors that correspond to the total cost of possession of your house.
Let’s look at the three examples we have discussed:
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$ 220,000 house with a rate of 6.75% and a deposit of 20% ($ 44,000)
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$ 300,000 house with a rate of 5.75% and a deposit of 20% ($ 60,000)
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$ 300,000 house with a rate of 5.75% and a deposit of 14.7% ($ 44,000)
In this case, the purchase of the cheaper house with the higher interest rate saves money on your deposit, PMI, monthly mortgage payments and total cost. But keep in mind that the figures will depend on your exact interest rate and your accommodation price. The lower price of the dwellings will not always beat the lower rate, especially if you do not have a 20% deposit in the two scenarios.
Learn more: How much does private mortgage insurance (PMI) cost?
Interest rates can affect housing prices in some cases. When interest rates are low, more people can potentially afford to buy a house. Therefore, housing prices could increase because sellers have the upper hand because more buyers are on the market. On the other hand, high interest rates can encourage people to buy a house. In this case, housing prices could drop because fewer buyers are on the market.
The purchase of a house when interest rates are high can be logical if the deposit, closing costs and mortgage payment is affordable. However, if you have the luxury to wait to buy, you can walk financially while waiting for interest rates and / or house prices to drop – especially if you use this time to save for a higher deposit or otherwise improve your finances. The time of the real estate market is difficult, even for the pros, so your best bet is to work with real estate and authorized mortgage professionals who can help you manage different scenarios and find a house and a mortgage that corresponds to your budget and your goals.
If you have an adjustable rate mortgage (ARM), then yes – your mortgage payment could drop to the next adjustment period after a drop in rates. Your mortgage can also increase if the rates increase with an arm. However, increases and rate decreases will not have an impact on your monthly payment if you have a fixed rate mortgage.
This article was published by Laura Grace Tarley.
