Should You Wait for Mortgage Rates to Go Down Before You Buy a Home?
In an effort to fight inflation, the Federal Reserve increased its target for the Federal Funds Rate, the rate that banks offer each other on overnight reserve loans, six times in 2022. The target rate rose from almost 0% at the beginning of the year to over 3.25% by the end of the year.
This caused the rates offered on other types of loans to increase as well. If you’ve been paying attention, you’ve noticed that the rates banks offer on personal loans, credit cards, and even mortgages have all gone up
People who have been in the market for a home have started to wonder if buying is still the best decision for them. If you were thinking of buying a house and are now pausing because interest rates are too high, the good news is that rates have gone up on savings vehicles as well.
Learn more about how rising rates affect home buying and what you can do with your money if you decide to hold off on buying that house.
How Rising Interest Rates Have Impacted Home Purchases
In a rising interest rate environment, the rate that banks and credit unions offer on mortgage loans increases as well. The average rate on a 30-year mortgage doubled from 3.22% in January 2022 to around 6.36% in January 2023.
This means that if you took out a mortgage loan now, your payments would be much higher than if you had borrowed the money in January for the same house. Because of this, some people are choosing not to take out mortgage loans at all or may simply no longer qualify for a mortgage on the same house they would have qualified for a year or two ago.
How have rising rates impacted monthly payments?
So how exactly does it compare? Let’s look at some examples using the current mortgage rate as well as historical rates over the last few years to see how it impacts the monthly principal and interest (not including insurance and taxes) payment per $100,000 borrowed.
As you can see, the difference is significant. In absolute dollar terms, it becomes more pronounced as the amount borrowed increases.
Of course, there are cheaper homes as well. The monthly P&I payment for a $250,000 mortgage in January 2022 would have been accompanied by an average principal and interest payment of $1,081, compared to a monthly principal and interest payment of $1,557 on that same mortgage a year later.
The average price of homes sold in the U.S. in the first quarter of 2022 was slightly over $500,000. The same comparison at that price level means the P&I payment in January 2022 would have been $2,162 vs $3,114 just one year later. That’s a $952 difference in less than a year.
Where to Put Your Down Payment Money for Now
It’s understandable then that some people have recently started to hold off on buying a home for now.
However, that may mean they are sitting on a pile of cash that they had intended to use for a down payment.
The obvious question then becomes what you should do with that savings.
If you aren’t going to use it in the immediate future but still want to have access to it in case rates start coming back down soon, it may make sense to put it in an interest-bearing account.
This is likely a better choice than doing nothing with it while inflation chips away at it or exposing it to the volatility of the stock market.
This may not sound like a great option at first. Just like the rates on loans have been low over the last several years, so have the rates you could earn. That’s not good for savers.
The good news is that with interest rates rising on loans, they have also been rising on savings, CD, and money market accounts. Here’s a brief overview of what those options look like.
Savings Account Rates
Putting your down payment money in a savings account will allow you to earn interest while still providing easy access to withdraw it if the need arises.
Most banks and credit unions offer savings accounts, so shop around until you find one that suits your needs.
- Rates tend to be higher at online banks
- May have a minimum required balance to avoid monthly fees
- Some savings accounts restrict the number of withdrawals you can make within a certain period of time
- Covered by FDIC insurance
CD Interest Rates
Certificates of deposit are similar to savings accounts. A key difference is that certificates of deposits have fixed maturities such as six months or a year.
You’ll incur a penalty if you withdraw your money before the maturity date, so make sure you pick the appropriate term.
If you might need the money sooner a shorter term is better although the rate will be lower, or you might just go with a savings account.
- Rates vary by term. The rate on a 1-year CD is generally at least as high as savings account rates
- FDIC insured
Money Market Account Rates
Money market accounts are very similar to savings accounts, often with higher minimum deposit requirements.
Sometimes, you may find money market accounts that offer higher rates than savings accounts although the difference is usually very small.
An added benefit is that money market accounts offer debit cards and check writing making it a little easier to access your money.
- Rates are similar to or lower than savings accounts
- Also covered by FDIC
Checking Account Rates
Checking accounts are the classic “cash” account.
Rates are usually very low, but they aren’t meant as a place to hold money that you are saving.
Checking accounts are best for money that you intend to spend as part of your normal budget.
- Rates below 1% are common
- FDIC insured
*rates shown are a general range. Actual rates offered by banks may be lower or higher
How You Can Still Buy That House
Just because rates have gone up doesn’t mean you can’t still buy a house of course.
If you decide to go ahead and follow through with your purchase, there may be some additional considerations for you to think about before you sign a contract.
Negotiate the Home Price
Higher interest rates mean a higher payment for the same mortgage balance, there’s no question about that. But what if you didn’t need to borrow as much money because the sales price was lower to begin with?
The reality of the current housing market makes home price negotiation more of a reality than it has been in recent years. Some markets have started to turn from a sellers’ market to a buyers’ market.
If you know what monthly payment you can afford, simply offer the price that will get you there based on the rate you are being offered.
The seller doesn’t have to agree of course, but if you can’t afford the home otherwise it doesn’t hurt to ask. You may be surprised.
Ask the Seller to Buy Down the Interest Rate
As part of the negotiation process, you may be able to get the seller to agree to buy down the mortgage rate.
This is very similar to when a buyer pays points in exchange for a lower rate, with the difference of course being that the seller is the one making the payment.
If they agree, the buydown could be added to the seller’s closing costs.
Make a Larger Down Payment
If you have the cash available, it could also be a good idea to make a larger down payment.
This hasn’t been as popular before because rates were so low that it often made more sense to put the money elsewhere.
However, at 7% it’s much easier to justify a larger down payment. This means the amount you need to borrow is less, so your payment will be lower.
Frequently Asked Questions
Should I wait until rates go back down to buy a house?
This is largely a personal choice driven by your budget. If you can’t afford a house with the current mortgage rates, then you should wait.
Consider what you can afford under the current interest rate environment, think about how far rates would need to fall to make a meaningful difference to you, and how long you are willing to wait.
Will the Fed keep raising interest rates?
The Fed has indicated that they will continue raising interest rates until inflation is under control, with many economists believing they will continue to raise interest rates at least through the end of 2022.
Will higher interest rates push home prices down?
Generally, higher interest rates put downward pressure on home prices because most people depend on mortgages to buy homes.
If mortgages are more expensive, people can’t afford to borrow as much so they can’t offer as much. However, that is only one factor, and you shouldn’t speculate based on the effect you think it might have.
How much is a good down payment?
The common rule of thumb is that you need 20% for a down payment because many lenders use that as a threshold to determine if mortgage insurance is required.
However, there are many programs available that allow you to put much less down and still qualify.
You can also put more than 20% down. What you decide should be driven by your risk tolerance, budget, other options available to you, and the type of lending program you use.
How do I grow my down payment?
The safest way to grow your down payment is to add more to it regularly. If you plan to use the money within five years, you don’t want to hold investments that fluctuate significantly, like stocks and equity mutual funds.