When you’re buying a new house, there are two things most home buyers will focus on: the interest rate and the home price. The home price is the total amount you pay for the house, and the interest rate is the amount you’re charged to take out a mortgage. Both play an important role in determining whether it’s a good time to buy and the type of house you can afford.
But when it comes to the interest rate vs. home price, does one matter more than the other? This example and videos will explain how the two work together and some things you should consider as you’re house hunting.
The home price, your down payment, and your interest rate will affect how much your monthly mortgage payment is. If you buy a more expensive house, your monthly payment will be higher. And higher interest rates will cause your monthly payment to go up as well.
Scenario 1: Lower Interest Rate
So, which is more important – the home price or your interest rate? Let’s consider a scenario where a buyer opts for a lower interest rate and higher home price. Because the interest rates are lower, the buyer can afford to buy a bigger house, which they assume will appreciate in value.
They purchase a $400,000 home and put down a 10% down payment. The loan term is 30 years, and their interest rate is 3.25%. Not counting homeowners insurance and taxes, their monthly payment will be $1,567.00.
Scenario 2: Lower House Price
In another scenario, the buyer prioritizes a lower home price and purchases a $300,000 house instead. By buying a lower-priced home, they’ll be able to build equity faster, which will allow them to refinance more easily.
And when you run the numbers, their monthly payments are considerably lower. Keeping all other factors the same, their monthly mortgage payment will be $1,175.00. That’s a monthly difference of $392.00.
Of course, lower prices may only come as a result of higher interest rates, so while we’ve kept the rate constant for the purposes of comparison, it will be important to run the numbers yourself based on what’s happening in your market.
The Bottom Line
The ideal scenario is to buy a home when both interest rates and home prices are low, but that isn’t always possible. So, as you’re considering home prices vs. interest rates, it’s important to keep in mind that one isn’t necessarily better than the other.
At the end of the day, it comes down to your goals and priorities as a buyer. Are you focused on buying a bigger home, or is your goal to keep your monthly payment as low as possible? If you buy a home with high rates or a high listing price, make sure you run the numbers, so you understand the short-term and long-term financial implications.
But when it comes to the interest rate vs. home price, does one matter more than the other? This example and videos will explain how the two work together and some things you should consider as you’re house hunting.
The home price, your down payment, and your interest rate will affect how much your monthly mortgage payment is. If you buy a more expensive house, your monthly payment will be higher. And higher interest rates will cause your monthly payment to go up as well.
Scenario 1: Lower Interest Rate
So, which is more important – the home price or your interest rate? Let’s consider a scenario where a buyer opts for a lower interest rate and higher home price. Because the interest rates are lower, the buyer can afford to buy a bigger house, which they assume will appreciate in value.
They purchase a $400,000 home and put down a 10% down payment. The loan term is 30 years, and their interest rate is 3.25%. Not counting homeowners insurance and taxes, their monthly payment will be $1,567.00.
Scenario 2: Lower House Price
In another scenario, the buyer prioritizes a lower home price and purchases a $300,000 house instead. By buying a lower-priced home, they’ll be able to build equity faster, which will allow them to refinance more easily.
And when you run the numbers, their monthly payments are considerably lower. Keeping all other factors the same, their monthly mortgage payment will be $1,175.00. That’s a monthly difference of $392.00.
Of course, lower prices may only come as a result of higher interest rates, so while we’ve kept the rate constant for the purposes of comparison, it will be important to run the numbers yourself based on what’s happening in your market.
The Bottom Line
The ideal scenario is to buy a home when both interest rates and home prices are low, but that isn’t always possible. So, as you’re considering home prices vs. interest rates, it’s important to keep in mind that one isn’t necessarily better than the other.
At the end of the day, it comes down to your goals and priorities as a buyer. Are you focused on buying a bigger home, or is your goal to keep your monthly payment as low as possible? If you buy a home with high rates or a high listing price, make sure you run the numbers, so you understand the short-term and long-term financial implications.