Property Value vs Mortgage Interest Rate: Which Holds More Weight in Home Buying?

With the ascend of home prices and the imminent rise of interest rates, as indicated by the National Association of Realtors, numerous prospective homeowners are grappling with a pressing query: Which holds greater significance - the property's value or the interest rate on the mortgage? The reality is that purchasing a home is a personal decision, greatly influenced by variations in property prices and mortgage rates, both of which can significantly affect your financial standing. Determining which of these elements weighs more heavily can be a game changer. If you're contemplating, "Which is more crucial, the property value or mortgage interest rate?", the following key factors merit serious consideration.

Do Increasing Interest Rates Favor Home Buyers?

To mitigate the highest inflation levels seen in the U.S in 40 years, the Federal Reserve recently elected to elevate rates. This past March saw the central bank raise its key interest rate by 0.25%, marking the first increase since 2018. Additional hikes have been predicted by the reserve as it strives to control inflation. This rate, known as the benchmark federal-funds rate, impacts the interest that consumers are charged by financial institutions. "Inflation continues to be high, reflecting imbalances in supply and demand related to the pandemic, a rise in energy prices, and wider price pressures," according to the Federal Open Market Committee.

Interestingly, escalated interest rates could potentially have a beneficial impact on property prices, and here's how: While home values are projected to diminish as we move further into 2022, annual appreciation recorded a boost of over 19 percent in January. Compared to a 9.4 percent increase from the previous year, annual appreciation is expected to drop below four percent by January 2023, as per CoreLogic's estimations. As the chief economist at First American, Mark Fleming, pointed out, "What ascends, must inevitably moderate. Rising rates might pose a challenge to the housing market in 2022, but as certain buyers retract from the market due to affordability and supply constraints, and new construction supplements supply, house prices will moderate, resulting in a more balanced housing market." This could result in a decrease in buyer competition, thereby reducing the upward pressure on prices.

Importance of Monitoring Inventory

The real estate market achieves equilibrium when there's roughly a six-month supply of homes available for purchase. A supply exceeding this typically indicates a buyer's market. Presently, the relatively tight inventory is exhibiting gradual signs of relaxation, as per the National Association of Realtors. In March, pending home sales, representing signed contracts on existing homes, fell 1.2%, stronger than the anticipated 1.8% decline; sales were down 8.2% year-over-year by April, as per expert predictions. If rates continue to ascend, these trends may persist, thereby relieving consumer stress, particularly for first-time homeowners.

Additional Aspects to Consider

Homeowner's Association Fees: Before relocating to a new neighborhood, it's advisable to check the homeowner's association fees. These fees can render an otherwise affordable property out of reach, potentially adding a considerable amount to your monthly housing expenses.

Taxes and Insurance: Alongside principal and interest, taxes and insurance contribute a large part to your monthly mortgage payment. Known as PITI, these expenses can fluctuate over time, even with a fixed-rate mortgage.

Maintenance: Maintaining a home can be costly, with some properties requiring more upkeep than others, potentially eating into your savings. For instance, if you opt for an older property, you might spend more on repairs compared to a newer one.

The Final Takeaway

So, which matters more: the property's value or the mortgage interest rate? Ultimately, the ideal time to purchase a property hinges on your readiness, both emotionally and financially. If increased rates render homes more affordable, securing a property well within your budget could be advantageous if you anticipate rates will eventually drop. Once rates decrease, you might have the option to refinance at a lower rate. Undoubtedly, securing a lower rate upfront is more beneficial than waiting for a rate drop and then refinancing. Moreover, a lower interest rate could enhance your purchasing power, as less of your monthly payment will be allocated towards interest. This implies that you could afford a higher-priced home in a lower-rate environment. For further insights into property prices and interest rates and how these could influence your home buying experience, feel free to contact your local CrossCountry Mortgage Advisor, or browse through our blog for more resources.