Things to Know About Buying a Home in a High Interest Rate Environment

 

Buying a house is an experience that some people love and other people hate. There is definitely excitement in home shopping, as you look around various neighborhoods and towns trying to find the perfect home. Imagining yourself or your family living in a particular house can be really special, and you can make a lot of memories in these homes before you even buy them!

 

While shopping for a home can be a very fun experience, there are a few factors that at least limit the fun. Geographic location, size, and price are all factors that complicate your housing search, and they largely shrink down the total number of houses that meet your criteria and budget. At times, it is even hard to find a single house that meets all of your criteria!

 

These struggles have been complicated by the recent mortgage interest rate hikes. In 2020, buyers could get mortgages with interest rates as low as 2.5%. In 2022, those rates have jumped substantially, now reaching levels above 6%. When interest rates go up, so do total housing costs. In this case, monthly payments on a new mortgage for an average house are likely now several hundred dollars higher than they were just two years ago.

 

While that may sound like a bad thing, there are truly some blessings in disguise in this whole scenario. This post is going to take a look at several things to know about buying a home with high interest rates. Some things will be advantages, some things will be disadvantages, and some things are just general knowledge that will be helpful as you enter the housing market.

 

Tree waving in front of gray wooden house

 

Advantages of Buying a House When Interest Rates Are High

 

To be frank, there are not any major advantages of buying a house when interest rates are high. This is not a favorable environment for buyers, and waiting until rates go down is almost always the better choice, as long as buyers are able to wait. If they are not, there are at least a few redeeming factors that come with buying a house when interest rates are high, although these benefits do not even come close to the advantages of buying a house when interest rates are low.

 

There Is Less Competition When Interest Rates Are High

 

When interest rates go up, competition tends to go down. This is because rising interest rates make houses overall more expensive, and this prices several buyers out of the market. At the end of the day, a buyer’s budget is usually pretty fixed. Therefore, if a buyer can afford to spend $2,000 per month on their mortgage, that number does not really change when the interest rates change. As a result, when interest rates rise, and buyers’ budgets stay the same, the total value of house that buyers are able to afford is less.

 

The resulting effect of this market movement is that less buyers are even able to afford a house in the first place, reducing competition for the buyers who have enough financial flexibility to still afford a house. If you have the funds necessary to purchase a house, even in the high interest rate environment, odds are that you will not have to worry very much about being outbid. While nobody wants to pay more than they have to for a house, this is a welcome development for buyers who have been consistently outbid for houses over the past year!

 

 

There Is Less Risk When Interest Rates Are High

 

When interest rates are high, buyers also tend to shop with lower risk. When the interest rates were low, the housing market went crazy. Buyers were submitting offers well above asking price, waiving normal contingencies, and often buying houses sight unseen. If they didn’t do this, they would have never been able to buy a house in that environment. As you may be able to see, waiving these contingencies is an incredibly risky behavior that should really be avoided, if possible.

 

In that market, it seemed unavoidable. It was almost impossible to buy a nice house without making these concessions as a buyer. The market was undoubtedly favoring sellers, and buyers were paying the price. As the market has cooled off and interest rates have risen, there is no longer a need to make these concessions as a buyer, which is absolutely a good thing. Waiving inspections, tours, and appraisals is incredibly risky, and really should only be done in extreme circumstances. Now that the total competition has decreased, buyers do not need to bend over backwards to have their offer on a house accepted, drastically reducing the risk of buying a home.

 

To take that further, it is a lot harder to overspend on a house when interest rates are elevated. In a low interest rate environment, many buyers are tempted to get the biggest, grandest house that they can afford. In a high interest environment, most buyers are priced out of overspending, as the interest really lowers the total home price that they can afford. In the future, if they opt to refinance when rates decrease, they are usually left in a great financial position.

 

Prices Begin to Drop When Interest Rates Are High

 

The final main advantage of shopping for a home when interest rates are high is that home prices tend to drop. In the early part of 2022, home prices soared in what was an extreme seller’s market. Since then, thanks to the significantly higher interest rates, housing prices have begun to drop back to affordable levels. This all boils down to simple economics.

 

In the early part of 2022, supply was low and demand was absurdly high. There simply were not enough houses on the market for the total number of people shopping, and this made the prices soar. This is what made buyers submit offers above the asking price and waive inspections and appraisals. When the interest rates rose, the demand for houses went down, as many people could no longer afford to buy a home. This decreased demand will push the average home price down over the immediate future, which could eventually enable buyers to get a little bit more bang for their buck.

 

man signing mortgage documents

 

Disadvantages of Buying a House When Interest Rates Are High

 

High interest rates are definitely not advantageous for home buyers. Most of the disadvantages of buying a house when interest rates are high are fairly obvious, and they almost all have to do with money. The advantages listed above are almost just mitigating factors that make the interest rate sting a little bit less, while the disadvantages below are real financial disadvantages that buyers will deal with each month for the full life of the loan.

 

You Will Pay More in Interest When Interest Rates Are High

 

When interest rates are high, you will pay more in interest each month. There really isn’t anything complex about it. The interest rates have doubled or tripled over the past two years, which means that buyers will pay double or triple as much interest as they would have prior to the rate hikes. Nobody wants to pay more than they need to for a house, and the stinging thing about increased interest rates is that you are not even getting any more house for your money. You are buying the same house that you would have bought previously, potentially for the same value, but paying more per month for it.

 

Obviously, this is a disadvantage for any buyer. Increased interest rates drain a buyer’s budget a bit faster than typical interest rates do, and they provide no added benefit. This is the main reason that many buyers wait to buy a home until the interest rates begin to fall once again, as the wait could save tens of thousands of dollars.

 

You Will Be Able to Afford Less of a House When Interest Rates Are High

 

As we mentioned earlier in this post, increased interest rates mean that most buyers can afford less of a house than they previously could. As most peoples’ budgets are relatively fixed or firm, they cannot afford to spend more per month on their mortgage payment. As their payment needs to stay the same, but the interest rate increases, the result is that the amount of money they can spend on a house decreases. While they may have previously been able to afford a $400,000 house, they might now only be able to afford one that is closer to $350,000 while still making the same monthly payment.

 

This affects some people more than it affects others. Some people need a large house that is towards the higher end of their budget, while other people are perfectly happy in a smaller home that fits comfortably in their budget. For the people who are already spending towards the upper limit of their budget, the increasing interest rates are crippling. For those who have a little bit more wiggle room in their budget, the increasing interest rates are just an inconvenience. In either case, the total cost of buying a home increases, which is a major disadvantage of the rising interest rates.

 

Your Interest Rate Stays With You for the Full Life of the Loan

 

One of the biggest disadvantages of buying a home when interest rates are high is that the interest rate on your mortgage stays with you for the full life of your loan, which is usually 30 years. If someone purchased a home in 2020, they likely locked in a 2.5% interest rate for the next 30 years. If someone were to buy a home today, they would lock in a rate much closer to 7% for the same time span. While the interest rates on the market change, the interest rate is fixed once you sign on the dotted line of your mortgage.

 

While buyers will feel the impact of an increased mortgage rate each month, thinking about what it looks like over the life of the mortgage is very eye-opening. This doubled or tripled interest rate will likely cost tens of thousands of dollars over the life of the loan. This is an absurd realization to make, knowing that the only difference between saving those thousands of dollars and spending them was waiting a few months to buy the house.

 

Drone shot of housing development in South Carolina

 

Other Things to Know About Buying a House when Interest Rates Are High

 

You Can Refinance Your Mortgage Later

 

Despite all of the negatives that come with buying a house when interest rates are high, there is at least one positive: a mortgage does not need to be permanent. While a buyer will always need to pay off their house, they are not locked in to the high interest rate forever. When interest rates fall, buyers have the option of refinancing their mortgage to land a more attractive interest rate. This is not available to everyone, and there is no guarantee that interest rates will decrease in the near future, but it is something to consider that may have an impact down the line.

 

What Is Refinancing?

 

Refinancing is when someone takes out a new mortgage to pay off their current mortgage. This is usually something that buyers do when the market interest rates are significantly lower than what they are currently paying. If someone takes out a mortgage at 7% and the interest rate falls to 3% a few years later, they may opt to refinance. In this case, they would take out a new mortgage that is enough to pay off their current mortgage, but the new mortgage would have the new, lower interest rate.

 

This is not always a great idea, as there are costs and fees associated with refinancing, but it can be a great option for some buyers. This is something to discuss with your realtor or mortgage lender. One of the downsides of refinancing is that when you take out a new, refinanced mortgage, you are usually extending the total amount of time that you will need to make payments on the house. If your first mortgage was for 30 years, and you refinance 5 years later, you will likely have to pay for a total of 35 years.

 

It Is Usually Best to Wait to Buy a Home Until Rates Come Down

 

With all of this having been said, it is important to underscore it all with one key point; it is usually a better idea to wait to buy a home if interest rates are high. In most cases, the rates come back down within a few years, which can save you thousands of dollars. While this is true, not everyone can sit around waiting for several years for the interest rates to drop back down before they take out a mortgage.

 

While waiting for a lower interest rate is the best generic advice that can be given, it is crucial to remember that every person’s or family’s situation is different, and there is no one-size-fits-all approach. Some people will be able to wait a few years to buy a home, and others will not. At the end of the day, if you need to buy a house in the near future, waiting for a lower interest rate shouldn’t really be a part of your decision-making process. This should only be a consideration if you are in no hurry at all.

 

kitchen with island and table in new home

 

Thank you for reading our post about buying a home when interest rates are high. Shopping for a home at any time is a whirlwind of fun and stress, and adding high interest rates into the mix tends to just complicate matters further. While your overall purchasing power does decrease when interest rates are high, high rates ultimately tame the market and make housing accessible and affordable in the long run. In the meantime, there are likely going to be less buyers in the market, decreasing your chances of being outbid as long as you have the funds necessary to buy a house. While now might not be the best time for everyone to buy a house, that doesn’t have to mean that it is just a bad time for everyone!

 

If you decide to visit Myrtle Beach or any other place in South Carolina and fall in love, reach out to us for help. We at The Boyd Team are always here to help you figure out whether Myrtle Beach is your next home or not, and we are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.  

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