How Interest Rates And House Prices Relate | Quicken Loans (2024)

As you start the home shopping process, you’ll likely realize a strong connection between mortgage interest rates and what homes you can afford. But the tie between interest rates and house prices goes deeper than your budget.

The correlation between interest rates and house prices can have a big impact on the housing market, and your home shopping journey. We explore what home buyers should know about these two factors.

What Is The Correlation Between House Prices And Interest Rates?

Interest rates and house prices tend to have a strong correlation in the real estate market. Generally speaking, when market interest rates are on the lower side, more demand in the housing market will follow. This typically drives up home prices. Meanwhile, higher market interest rates typically go together with a reduced demand for homes, leading to lower home prices.

Historical Interest Rates Vs. Home Prices

If you’ve been paying attention to the housing market over the last few years, you’ve likely noticed a connection between interest rates and the housing market.

For example, when interest rates dropped in 2020, the housing market saw a big uptick in competition among buyers, which drove up sale prices. If you were shopping for a home in 2021, you probably encountered the fall out of low interest rates in the form of bidding wars and rising home prices.

As the Federal Reserve changes the federal funds rate, mortgage interest rates tend to follow. In general, the Fed increases interest rates when inflation is above the target of 2%.

The changing mortgage rates can significantly impact prospective homebuyers. Generally, housing prices tend to stabilize or fall when mortgage rates climb.

The table below illustrates how interest rates and home prices usually tend to move in opposite directions.

How Do Interest Rates Affect House Prices For Home Buyers?

House prices and interest rates directly impact down payment amounts, monthly payment amounts and the total amount of interest they’ll pay over the life of their loan.

Down Payment

Most home buyers who use a mortgage loan to finance their purchase will need to put down a certain percentage of the sale price.

The standard is 20% down if you’re looking to avoid private mortgage insurance; however, the median down payment for U.S. buyers is 13%, according to the National Association of REALTORS^®. On a conventional loan, it’s possible to go as low as 3%.

When considering how much home you can afford, it’s important to think about how much cash you have available to put down. If you put 13% down on a home that costs $200,000, you’ll need $26,000 to close on the home. If that house costs $250,000, you’ll need $32,500.

Monthly Mortgage Payment

Both the price of the home and the rate on your mortgage will affect the size of your monthly mortgage payments.

Excluding taxes and insurance, your monthly mortgage payment is made up of two basic elements: principal and interest. Principal is the initial amount you borrowed, and interest is the amount you’re charged for borrowing that money.

It might seem obvious how the price of a home will impact the amount you pay each month, but you may not realize how much your mortgage interest rate can impact this as well.

Say you get a 30-year fixed-rate mortgage for $200,000 with an interest rate of 4%. Your monthly payment will be about $955. Contrast this with a $200,000 loan at 3.5%, with which you’ll have a monthly payment of roughly $898. That’s a $57 difference each month.

Total Interest Paid

A higher interest rate on a mortgage loan means you’ll pay more in interest each month, which adds up to more interest over the life of your loan. Ultimately, this can lead to spending thousands of extra dollars on your homeownership costs.

For example, a home buyer with a 30-year, fixed-rate mortgage for $200,000 with a 4% interest rate will pay $143,739 in interest over the life of the loan. In contrast, a home buyer with a $200,000 loan and a 3.5% interest rate will pay $123,312 over the loan term. The small difference in interest rates could lead to paying over $20,000 more.

FAQs: Interest Rates And House Prices

Now that we’ve touched on the basics, let’s run through the questions you might have.

Is it better to have a lower interest rate or lower home price?

While a lower interest rate can make homeownership significantly more affordable, selecting a lower home price is something that’s within your control. It’s ideal to have both a low interest rate and low home price. But you’ll likely build equity faster if you choose a home with a lower price.

Should I buy a house if the interest rates are high?

If you are ready to move forward with a home purchase and your finances can support the decision, then high interest rates shouldn’t stop you from pursuing homeownership. If you aren’t in a rush to buy a home, you can always take a “wait and see” approach, but keep in mind that while prices or rates could drop, they could also stay the same or even go up.

Is it possible to get a lower interest rate?

Home buyers can purchase mortgage points to lock in a lower rate. Mortgage points, also called discount points, offer borrowers the opportunity to pay an extra fee during the closing process to lock in a lower interest rate on their home purchase or refinance.

The Bottom Line

The best time to purchase a home is when you’re ready for the major financial commitment. Since home prices and interest rates are constantly changing, it’s difficult to time the market to your advantage. Instead of trying to find the perfect balance of interest rates and home prices, work on readying your finances for homeownership by saving for a down payment, building up your credit score and paying down any debt you owe.

If you are ready for homeownership, .