Some would-be home buyers are holding off on a home purchase right now because of how current mortgage interest rates are impacting their potential monthly payment.

But, will monthly housing costs be considerably lower in the future?

That all depends on whether mortgage interest rates drop faster than home prices rise.

Let's take a look at a sample scenario and make some guesses about the future.

If you were to consider buying a home for $325,000 today and financing 80% (an 80% loan to value ratio) of the purchase price at 6.75% your mortgage payment would be $2,017.

$325,000 home w/ 80% LTV @ 6.75% = $2,017

Then, let's assume over the course of a year, the mortgage interest rates drops to 6.5%... but home prices rise 3%.

$334,750 home w/ 80% LTV @ 6.50% = $2,033

Oops... the mortgage payment rose despite lower mortgage interest rates.

Then, over the following year, mortgage interest rates drop to 6.25%... but home prices rise 3%.

$344,793 home w/ 80% LTV @ 6.25% = $2,048

Again... the monthly housing cost rose.

One more time to illustrate a point you are likely already understanding... let's say over the following year mortgage interest rates drop to 6% but home prices rise 3%.

$355,136 home w/80% LTV @ 6.00% = $2,065

Hopefully this illustrates the main challenge with waiting to buy until mortgage rates fall.  That can definitely be a solid strategy -- but it relies heavily on rates falling faster than prices rise.

My illustration above was showing a 0.25% drop in mortgage interest rates a year and a 3% increase in home prices.

I'd love to say we'd see mortgage interest rates fall more quickly than that, but I don't know whether we can count on that over the next few years.

All this is to say that if you are waiting to buy a home until mortgage interest rates drop so that your housing costs will be lower -- I get it, that makes sense -- but the only way that strategy works is if mortgage rates decline. 

 

I hope they do, but it isn't something we can necessarily depend on.

If you want to talk through a variety of scenarios related to potential purchase prices, mortgage interest rates, monthly housing costs, etc. -- I'm happy to help you run some numbers, or I can connect you with a wonderful local lender.