Paige Cerulli Last Updated On: December 11, 2023

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What Soaring Mortgage Interest Rates Mean for Homebuyers

While the pandemic sent home prices soaring, the real estate market was finally starting to cool off last year, with home prices declining. Those falling prices were due in part to climbing interest rates. As interest rates increase, buyers start to put off home purchases, and the reduced demand causes prices to fall.

That is, until now. This year, prices have started to increase, even in the face of record-high mortgage interest rates. According to Mortgage News Daily, as of October 27, interest rates for a 30-year fixed mortgage were 7.88%, and rates for a 15-year fixed mortgage were 7.24%. In comparison, rates on January 9, 2023 were 6.31% for a 30-year fixed mortgage, and 5.35% for a 15-year fixed mortgage.

The Impact of Climbing Interest Rates on Homebuyers

Pairing higher interest rates with higher home prices mean that buyers will ultimately pay more for their homes. Home affordability suffers as interest rates climb, too. According to the latest data available from the Federal Reserve Bank of Atlanta, in August 2023, the median home price was $377,500, and the interest rate was 7.1%. Principal and interest was $2,277 per month, and the total median monthly payment including private mortgage insurance, principal, interest, and taxes was $2,848, a figure that was already unaffordable for many. The climbing interest rate makes home prices even more difficult for many to afford. 

Teddi Schill, CEO of the Portland Area Home Group, explains that high interest rates have several effects on buyers. “High interest rates are making it more expensive to buy a home,” says Schill. “This leads to decreased demand for homes, causing home prices to stagnate. Additionally, high interest rates are making it more difficult for people to qualify for a mortgage, reducing the pool of potential homebuyers.”

Peter Kim, CEO of Odigo Real Estate Club, explains that while interest rates are climbing, home buyers who can afford those rates are still buying. “The wisest move to make is to buy now at suppressed home prices, then refinance later,” says Kim. “However, most home buyers are not able to do this, so they are putting off their home purchases until rates go down. The problem is, when rates go down, an influx of buyers will prop up the prices to levels where their payments will virtually be the same, if not more, because you’re taking out a bigger loan to win the multiple offer situation.”

Considerations When Facing High Mortgage Rates

Kim recommends that buyers shop around and compare interest rates from multiple lenders. “Shop at least three lenders, and ask your agent who their top three lenders are,” he says. “Credit unions have generally had the best rates in this high-rate season, so make sure you are checking with them even if you don’t have an account with them. Also, ask your lender to buy down some of the rates for you. Trust me, most agents will do it, especially if you say you’re going with another agent.”

Getting pre-approved for a mortgage before shopping for a home will give buyers an idea of how much they can afford to borrow, and what their monthly mortgage payments will be.

Schill notes that buyers have several options when faced with high-interest rates. Making a larger down payment will reduce the amount of money that they will need to borrow, which lowers the monthly mortgage payments. A shorter-term mortgage may also be an option. “Shorter-term mortgages have higher monthly payments, but they also have lower overall interest costs,” says Schill.

Buyers may also want to consider an adjustable-rate mortgage (ARM). “Arms have lower interest rates in the initial years, but the interest rate can adjust up or down after that,” Schill explains. “Buyers should carefully consider the risks and benefits of ARMs before deciding.”

Kim encourages buyers to consider whether they can afford high mortgage payments that result from high interest rates. He notes that buyers should also consider having at least six months of emergency savings in case they face a major problem like job loss or a health issue. “Home buyers should consider budgeting and be willing to live minimally until they have the opportunity to refinance their home,” Kim says.

Closing on your home presents another opportunity to potentially keep costs down. “If there are no other offers, make sure your agent negotiates with the seller and gets the full amount of credit for closing costs, which is typically 3% at most,” says Kim. “That way, you can use the closing cost credit to pay for your lender fees along with buying down points. With enough money, you can get rates low enough to save hundreds per month.”

Buying a home in today’s real estate market is challenging, and buyers need to be prepared to face high mortgage rates. While high-interest rates can increase the cost of buying a home, buyers who are strategic and who explore all of their options can find ways to minimize their costs. 

Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.

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