Should You Buy a House with a High Mortgage Rate?
Higher mortgage rates make financing a home more expensive over the loan term. Discover options for buying a house and save money, even with a high APR.
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Learning that mortgage rates have gone up can feel like a dagger in your homeownership dreams. Your mortgage rate affects your monthly mortgage payment, the total interest you pay, and how much house you can afford. So naturally, it's worth considering whether buying a house at a high interest rate—more specifically, financing a house at a high interest rate—is a wise move.
How a 5.7% APR compares to a 2.88% APR
If you purchase a $428,000 home with a 3.5% down payment at a fixed APR of 5.7% over 30 years, your mortgage payment would be about $3,337 each month (including private mortgage insurance). By comparison, financing at 2.88%—the median rate in mid-July 2021—would put your payment at $2,655.
At 5.7%, you'd pay a total of $449,961 in interest over the life of the loan. That's double what you'd pay if you financed at 2.88% ($204,270) and more than the cost of the home itself.
What a higher mortgage rate means
Increased costs are the most obvious effect of higher mortgage rates, but that's not the only factor to consider.
You may have to adjust your budget or your expectations, or both. Most lenders expect your total debt payments below 36% of your monthly income, so you may have to shop for a lower-priced home than you initially planned. Some lenders may stretch the debt-to-income ratio requirement to 45% if your finances are strong, i.e. you have a bigger down payment, low debt, and good income. You still may have to make some sacrifices. Spending more on your mortgage could affect your other financial goals—like saving for retirement.
Since your mortgage rate is partly based on your FICO® Score, maintaining good credit could help you buy a home. Consider taking some time to improve your credit so you can qualify for a better rate. Moving into a higher credit tier could shave hundreds off your mortgage payment and save on interest.
It's hard to predict what will happen to home prices, but also note that falling home values, particularly in the early years of homeownership, could put you upside-down in your loan. When you owe more than your home is worth, selling or refinancing is tough. Plus, you wouldn't have access to home equity regardless of how many payments you've made.
Renting may be more favorable—for now
Some people think of renting as "throwing away money" or "paying the landlord's mortgage", but it's not always that simple. Renting could make more sense, financially, when rent is lower than your would-be mortgage payment. If you continue renting, you can take advantage of the cost difference by putting the surplus aside each month. This preps you for a higher mortgage payment and creates a cushion for unexpected expenses.
Even when the numbers line up, buying is more beneficial than renting only if you stay in the home for a certain period of time. Selling too soon can wipe out your gains.
Lower the cost of a high rate
Every homebuyer's situation is different so you have to weigh costs and benefits to determine what's best for you. If you run the numbers and decide to move forward with your purchase, you have a few options to soften the impact.
- Make a bigger down payment. Because you're borrowing less, you'll pay less interest over the life of the loan.
- Opt for a shorter term. Paying your loan back sooner lowers the interest you pay, but you'll have a much higher monthly payment.
- Buy down your interest rate. The lump sum payment can lower your interest rate and monthly payment, but only to a certain limit.
- Ask your lender about no-cost loan options. This won't lower your rate or payment but will lower the overall cost of buying a home.
Keep your finances strong. If you're locked into a high APR and rates drop, refinancing is an option—if it makes financial sense, of course.
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