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Will Lower Mortgage Rates Help Buyers?

It depends. Lower interest rates reduce the amount of interest owed on a mortgage, which also means lower monthly payments. However, lower interest rates may also increase demand for homes from competing buyers. Higher demand generally results in higher home prices, and can sometimes cause buyers to compete with multiple offers from other buyers.

As a general guideline:

Mortgage rates do impact home values, and the two typically have an inverse relationship: 

  • When mortgage interest rates rise, home buyers can’t afford expensive mortgage payments, so the home values may be flat or even start to drop.
  • The reverse is also true! When interest rates are low, buyers have more buying power, so home prices may start to rise as demand surges. 

Sometimes home values are sticky due to the lock-in effect of existing sellers not wanting to give up their low interest rate. Therefore, as interest rates rise, home prices don’t always drop as quickly or as significantly as anticipated, especially if the inventory of homes for sale is low. This makes the relationship between interest rates and home prices less distinct and market-dependent. 

The best way to see how the relationship works is by comparing two scenarios:

Scenario 1: Lower Interest Rate, Higher House Price

In this scenario, a buyer goes for a lower interest rate but the local market is competitive and they expect a higher home price.

They purchase a $440,000 home with 10% down payment for a loan amount of $400,000. The loan term is 30 years, and their interest rate is 7%. Not counting homeowners insurance and taxes, their monthly payment will be $2,661.00.

Scenario 2: Lower House Price, Higher Interest Rate

In another scenario, the buyer purchases in a higher interest rate environment and they expect home prices to remain lower.

A similar home can now be purchased for $390,000 with the same $40,000 down payment as above for a loan amount of $350,000. The loan term is 30 years, and their interest rate is higher at 8%. Not counting homeowners insurance and taxes, their monthly payment will be $2,568.00.

And when you run the numbers, their monthly payments are within $100 of each other. The payments are similar because lower interest rates create higher home prices.

Navigating the market complexities of interest rates and home prices to help clients achieve their goals is what we do best. 

When it comes to buying or selling real estate in North Atlanta, you deserve better than an average agent. Seek a Strategic Guide from Path & Post!

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