The Relationship Between Interest Rates and House Prices
Every home purchase involving a mortgage includes two major financial considerations: the price of the home and the interest rate of the loan. How do these two sides of the same coin affect the overall price of a house, and how do they affect your decision to purchase a home? We’ll address any confusion you may have by explaining the dynamic between your interest rate and the price of your home.
To help us demystify this relationship, we invited Jaime Bargiel, SVP of Sales & Marketing, and Michael Cooney, EVP at Shea Mortgage, to provide their insight.
How Much Interest Will I Pay on my House? 5 Common Misconceptions
There are a few common misconceptions about mortgage rates that can affect a new homeowner’s perception of how much they’ll owe. According to Jaime, these are:
Your interest rate reflects the total cost of your mortgage.
Your pre-qualified mortgage rate quote will be your actual mortgage rate.
Mortgage rates are only released once per day.
Your best credit score is used in your loan approval.
Advertised mortgage rates will always be the rates you receive.
When buying a home, the overall mortgage cost is calculated based on the total amount paid back to the lender over the life of the home loan. The overall cost of the mortgage can vary depending on the interest rates and home prices. In fact, mortgage interest rates and house prices have an inverse relationship: If interest rates are low, but a home price is high, it is possible that the overall cost of the mortgage will be lower than if interest rates were high, but home prices were low. However, there are several additional factors that affect the total cost of the mortgage. A mortgage interest rate can be affected by a concept called mortgage points, where you buy “points” during the mortgage process to help get a lower interest rate. Each point is 1% of your loan amount. You can think of this concept as essentially prepaying a portion of the interest on your loan. However, this works best in favor of homeowners who plan to stay in the home for a long period of time. If you happen to sell your home before paying off the loan, then it’s possible you would have paid more up-front in points than you made up with your reduced interest.
Additionally, some homeowners use extra cash, like a tax refund or bonus, to make additional payments to their mortgage. This affects how much interest they will pay, overall.
It’s important to remember that advertised mortgage rates may not match the rate you’re qualified to receive. The rate determined by your lender reflects your credit score, the type of home you’re purchasing, the price of the home, your down payment, and even your debt.
What Else Do I Need to Know About Home Interest Rates?
Before making a decision to act on a lower mortgage rate, it’s important to first understand how these rates are influenced nationally. While the Federal government does not actually set mortgage rates, it can affect them. Michael says, “The Fed determines the federal funds rate, which impacts short-term and variable rates. When the federal funds rate increases, it becomes more expensive for banks to borrow from other banks. Higher costs may be passed on to consumers in the form of higher interest rates on lines of credit, auto loans and potentially mortgages.”
Additionally, a lender’s mortgage rates can be affected by other factors, such as federal “monetary policy.” Thus, a lender’s ability to offer a low mortgage rate is influenced by external factors that often fluctuate.
When is a Good Time to Buy a House? Is It When Interest Rates are Low?
The best time to buy a house is dependent on your financial capabilities and the many factors that affect each particular mortgage. In some cases, a low interest rate will help with the overall affordability of a mortgage, and can positively influence the manageability of monthly payments. However, if you’re on the fence about buying a more expensive house, consider Jaime’s wisdom: “The best advice for potential new homeowners is always to purchase a home that you feel is within your range of affordability. With lower interest rates, a buyer could potentially qualify for a mortgage on a home that is priced higher than they initially thought they could, which can be great news! That said, just because you can qualify for a larger purchase price doesn’t always mean that’s the best choice for you. A buyer should evaluate their proposed mortgage payment and purchase a home at a price that provides a payment they will be comfortable with each month in addition to their existing liabilities.” Consult with a Shea Mortgage Loan Counselor to learn more.
Furthermore, it’s wise to consider any additional obstacles in your life that may make buying a house risky. These can range from issues saving for a down payment, fluctuations in your job, or recent credit events that may affect your score. Luckily, Jaime is optimistic about how your other debts may be affected by the federal funds rate, “Federal Mortgage Rates impact Auto Loans, Credit Cards and more. With lower rates on all debts, buyers can potentially afford a higher mortgage or have more money left over each month to pay down existing liabilities.”
Whether you’re looking to buy a house now or in the coming years, stay aware of the changes in interest rates and include them as a factor when you consider the range of what you can afford. While it may not be wise to buy the more expensive house, you might be able to afford more than you expected. You may be able to save money to fix up an older home or perhaps buy a new construction. If you’re interested in taking advantage of low interest rates, Shea’s quick move-in homes are ready when you are.