I’m Buying a House When Interest Rates Are Still Sky High, and Here’s Why

published Jun 4, 2024
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When I sold my house in Denver in 2024, the only thing I wanted to bring with me was my 3% interest rate. My fiancé and I are both selling our houses and buying a house together, and he didn’t want to ditch his interest rate, either. In the game of interest rate limbo — how low could we go in 2021, when rates historically bottomed out? — my fiancé shimmied all the way down to 2.8% on his home.

It’s a bummer to take on a significantly higher interest rate (ICYMI: Interest rates on 30-year fixed rate mortgages have been hovering above 7%) and say goodbye to our green interest rate pastures.

But there’s actually a silver lining if you can afford to enter the market right now. While it’s tempting to sit things out to see if interest rates might come down, my fiancé and I are actually experiencing something surprising: There’s way less competition for homes right now.

We’ve been noticing the homes we’ve “hearted” on Zillow keep tumbling down in price the longer they stay on the market, and, while there’s no crystal ball, I suspect the home prices will shoot back up as soon as interest rates drop and more buyers hit the homebuying circuit. 

In fact, Bill Ryze, a certified chartered financial consultant (ChFC) from Tennessee and a board adviser at Fiona.com, actually argues that the best time to buy a home is when interest rates are high. 

“When interest rates rise, buyers usually hesitate,” he says. “It leads to less competition in the market. As a result, home prices become more affordable and favorable for buyers. Sellers might be willing to negotiate, which can benefit a buyer.”

But how can you fully utilize high interest rates to your advantage? Here’s some more intel on buying a home when interest rates are higher than they have been in recent years.

Buyer Interest Might Skyrocket at the End of the Year

First things first: Homes are not exactly getting more affordable. Home prices have risen by 6% year-over-year, explains Brian Vieaux, the president and COO of FinLocker, a financial fitness app. Based on current trends, a home valued at $450,000 today could appreciate to $477,000 in just one year, he says.

Both the Mortgage Bankers Association and Fannie Mae forecast the interest rate for a 30-year fixed-rate mortgage to be 6.4% by the end of this year. When this happens, buyers can expect a surge in demand and home values, Vieaux says.

“This could lead to bidding wars, inflated prices, and less choice for those who wait,” he says.

What to Remember About Refinancing Your Rates

Though you’re locked in with your purchase price, you can refinance your mortgage rates down the line if the rates drop. There’s a risk to that, obviously — there’s no guarantee that rates will drop in the future. (In fact, I lean more toward the classic school of thought that “the best time to buy a house is when you can afford to.”)

However, the Feds have said they’ll lower interest rates at some point this year, and we’ve struck a deal with our lender that we’ll get a free refinance on our rates between six months and three years of buying our home, should rates drop.

We’ve also got a savvy Realtor in our corner who’s working with us to get an additional rate buydown, a strategy where you can lower your monthly interest rates for the first few years of your mortgage. Builders and sellers may both offer these types of buydowns.

We’re pushing for a “3-2-1 buydown,” which means the interest rate is reduced by 3 percentage points for the first year, 2 percentage points for the second year, 1 percentage point for the third year, and then returns to the market rate for the remaining term of the loan. This buydown strategy from builders and sellers is different from purchasing a mortgage buydown

Other Strategies for Buying When Interest Rates Are High

Something to keep in mind as interest rates fluctuate: A 1% increase in the rate may amount to a few hundred dollars on each monthly payment, says financial planner Jessica Majeski, CFP, at Northwestern Mutual. Another thing to keep in mind? The rates seen during the beginning of the pandemic may never be seen again.

“Interest rates were historically low for a historically long period of time,” she says. “So it’s not realistic to assume that you can wait around for much lower rates before you buy a home because it probably won’t happen in the near term.” 

Instead, be realistic about what you can afford at today’s interest rates and always leave room in the budget for inevitable home maintenance and the rising costs of taxes and insurance, Majeski says. (In our case, if rates were to drop, it’d be a bonus — but not anything we’re banking on, and our long-term budget assumes they’ll stay at the rate we lock in at). 

A higher down payment will typically result in a lower interest rate, she points out. So it might be worth considering a 25% or 30% down payment when buying a home in a higher interest rate environment, Majeski says. 

It’s also important to consider the impact of private mortgage insurance (PMI) when determining the price point that you can afford. If you are unable to make at least a 20% down payment, then you may need to pay hundreds more each month for PMI until your loan balance falls below 80% of the value of your home, she says.

One more thing to consider: Adjustable-rate mortgages often have lower initial rates, and while they do come with risks, they might make sense if you plan to sell or refinance before the rate adjusts, Ryze says.