By Andrew Hancock - Mortgage Loan Officer, Okemos
Many buyers hesitate to purchase a home, hoping to time the market and buy when interest rates drop. While lower rates can reduce monthly payments, waiting may end up costing more than you expect.
Mortgage interest rates and home prices are inversely related: when rates drop, home prices tend to rise. The year 2020 marked a turning point, bringing the lowest mortgage rates in history. These low rates also fueled increased competition in the housing market, causing home prices to appreciate much faster than usual, with an average rise of about 5% per year. In fact, from 2014 to 2024, Detroit saw some of the greatest appreciation, with home values more than doubling over (over 200%).
When interest rates fall, buyers can afford larger loans without increasing their monthly payments. For instance:
The 5% appreciation in the example is conservative; factors like increased competition, low inventory, and regional dynamics can drive appreciation even higher. While lower interest rates reduce monthly payments, rising home prices may offset those savings, making waiting a costly decision.
A typical argument to this would be that you end up paying more in interest over the final 20 years. That's correct, unless you refinance. This is why the mantra is "Date the Rate, Marry the Home" - buy the home now and refinance when the rates drop.
Many buyers hesitate to purchase a home, hoping to time the market and buy when interest rates drop. While lower rates can reduce monthly payments, waiting may end up costing more than you expect.
Mortgage interest rates and home prices are inversely related: when rates drop, home prices tend to rise. The year 2020 marked a turning point, bringing the lowest mortgage rates in history. These low rates also fueled increased competition in the housing market, causing home prices to appreciate much faster than usual, with an average rise of about 5% per year. In fact, from 2014 to 2024, Detroit saw some of the greatest appreciation, with home values more than doubling over (over 200%).
When interest rates fall, buyers can afford larger loans without increasing their monthly payments. For instance:
- At a 7% interest rate, a $1,800/month payment would qualify for a $270,000 loan.
- At a 6% interest rate, that same $1,800/month payment could afford a $300,000 loan - a $30,000 boost in purchasing power.
Home Price Appreciation Cost
Example Calculation (1-Year Delay):- Home Price: $270,000
- $270,000 at 7% Monthly Payment = $1,796
- Annual Appreciation Rate: 5% (a conservative estimate based on historical trends)
- Future Home Price After 1 Year: $270,000 x (105%) = $283,500
- $283,500 at 6% Monthly Payment = $1,696
Waiting for interest rates to drop saved you $100 per month, but you missed out on $13,500 in appreciation. The total cost of delaying for one year is $12,300. To break even, it would take over 10 years.
12,300/100 = 123 ---> 123/12 = 10.25 YearsThe 5% appreciation in the example is conservative; factors like increased competition, low inventory, and regional dynamics can drive appreciation even higher. While lower interest rates reduce monthly payments, rising home prices may offset those savings, making waiting a costly decision.
A typical argument to this would be that you end up paying more in interest over the final 20 years. That's correct, unless you refinance. This is why the mantra is "Date the Rate, Marry the Home" - buy the home now and refinance when the rates drop.