Do you ever consider the impact of interest rates on the price of your home? Here’s a quick overview of how these rates affect you.
63% of American homeowners are living in homes with outstanding mortgages.¹ Considering that some of the remaining 37% have completed the payments on their houses, it is safe to assume that most people use debt as a financier when buying property.
Interest rates should be one of your main considerations when purchasing a house through a mortgage. Any slight increase to the rates can change your repayment amount, pushing the previously affordable property prices out of your range.
So, how are interest rates and house pricing related? We take a look at that below.
Determinants of House Pricing
The amount of money you pay for your house will depend on three main things;
- agreed price of sale
- down payment paid
- The mortgage interest rate
The Agreed Price of Sale
This is the amount you agree to pay the seller of the house so that they can transfer ownership to you. It does not involve the calculation of interest.
If you make the purchase in cash, this payment completes the process, and the rights to the property pass to you without the need to make any future payments.
The Down Payment
You will need to pay a certain percentage of the selling price before you qualify for a mortgage loan. This payment is part of the final cost of the property and is paid upfront.
The average down payment when purchasing an American home is about 12%. However, prospective homeowners can pay above 20% of the price to avoid paying private mortgage insurance.²
Mortgage Interest Rate
The additional amount required to purchase the home after paying the down payment is given to you as a mortgage loan, which attracts interest. Lenders will charge you a rate based on your credit history, the down payment amount, the house price, etc.
Low mortgage rates make buying the property more affordable, increasing the number of houses sold.
Talk to one of our expert advisors about the CalPATH Home Loan Program and how you can use your mortgage to increase your savings.
Interest Rates and House Pricing
Buyers who purchase a property when the interest rate is high should pay as much down-payment as they can. This means that they will pay a lower cumulative amount as the amount loaned to them by the mortgage company is small.
When mortgage rates drop, the houses are more affordable, and the small down payment amount does not significantly affect the final amount paid.
More people are able to purchase property at low-interest rates, increasing their demand in the market. The houses available for purchase in the market at this time reduce.
Pro Tip: If the mortgage interest rates in the market are high, and you anticipate a drop soon, you can buy the houses when they are in low demand, then refinance the mortgage when the rates go down.
The Effect of Mortgage Interest Rates on House Pricing
Knowing when to buy a house in relation to the mortgage interest rates can save you a lot of money in the long run. High rates increase the total cumulative amount to be paid on the house, making it less affordable.
“About Mountain West Financial and the CalPATH Home Loan Program
Mountain West Financial is the exclusive lender offering CalPATH, the #1 home loan program for Teachers, Police Officers, Firefighters, and other public employees who serve our local California communities.
You may contact our CalPATH Hotline @ 800-310-7577, seven days a week from (8:30 am to 8:00 pm). A CalPATH advisor will be standing by to answer (any & all) questions you may have about the home buying or refinance process.
We look forward to working with you soon!
Links To External Sources
- Nearly 40% Of Homes In The U.S. Are Free And Clear Of A Mortgage – https://www.forbes.com/sites/brendarichardson/2019/07/26/nearly-40-of-homes-in-the-us-are-free-and-clear-of-a-mortgage/
- What’s more important when applying for a mortgage: excellent credit or 20% down payment? – https://www.cnbc.com/select/the-most-important-factor-in-getting-an-affordable-mortgage/