Two housing market shifts encourage potential homebuyers to call real estate agents. The first is a drop in housing prices and the second is low mortgage rates. Deciding which factor is more important can make a difference in several ways. The most important may be in your wallet.

Impact on the Monthly Payment

Suppose you started your home search process when interest rates were 4%. You saw a one-bedroom condo for sale for $100,000. You calculated your 30-year monthly mortgage payment on $80,000: the amount you would be mortgaging after a 20% down payment and your closing costs. Your monthly payment would be $382. You decide you can do better than this payment and rate, so you wait six months and the interest rate drops to 2%. But a condo in the neighborhood you want now costs $120,000. You put down 20% plus closing costs and you're left with a mortgage of $96,000. Your monthly payment on a 30-year mortgage works out to $355. Your payment dropped by $27. Your monthly mortgage payment would have been $296 if real estate prices hadn't risen in your prospective neighborhood from the $100,000 price point at which you started and if you had snagged a 2% interest rate.

You can gather certain information to enter into a mortgage calculator to see what your payments would be.

Impact on Down Payments

Your monthly payment dropped because of a lower interest rate in the example of the condo that rose in price from $100,000 to $120,000, but would the lower payment help you if you didn’t have an extra $4,000 for a larger down payment? The difference in the down payment could eliminate the possibility of buying the home you want or it could knock you out of the buyer’s market altogether if you couldn't find a cheaper neighborhood. And losing that extra $4,000 will affect your ability to pay for unexpected home repairs, reduce the amount of your emergency savings, and diminish your ability to afford to furnish your new home.

Trends in Interest Rates

How do you know what a good rate is? You can keep track on the Freddie Mac website. Fixed interest rates on 30-year mortgages climbed during the first half of 2023 and are expected to continue rising during the second half of the year due to the strong economy, persistent inflation, and interest rate policy decisions on the part of the Federal Reserve.

Impacts on Movability

Interest rates don’t matter as much if you can easily afford your payments and you plan to live in your home for five years or less. It’s never a guarantee that housing prices won’t drop further, but you can view estimated housing prices for the last 10 years by selecting an address in the neighborhood you're studying online. Always compare neighborhood values rather than national or city by city. Home price patterns can vary greatly from neighborhood to neighborhood and from state to state. The likelihood that you'll owe more than your home is worth (known as being underwater) will be less if you buy a home when your local real estate market is below its peak.

The HOA Factor

Not every house you consider will be in a planned or gated community or condominium with a homeowner association (HOA). But HOA fees are often more expensive for higher-priced homes if that's where you end up, and they can climb higher when more homes are vacant.

HOAs cover shared services such as lawn maintenance, condo maintenance, clubhouses, pools, tennis courts, or private streets. They go up when fewer homeowners share the cost. As with other historic data, you should contact prospective HOAs and ask for their rates over the last 10 years.

You should also ask about maximum fees and find out which factors determine rate hikes and decreases. Seek out information about HOA fees on all the homes you're considering. HOA payments can present an excessive monthly burden in low-interest-rate environments so make sure that these payments are factored into your monthly budget.

The Effect of Refinancing

An advantage of buying a home at a lower price compared to getting a lower interest rate is that your home can be refinanced or modified in the future. If interest rates decrease, you can lower your costs. The problem with high initial interest rates can be mitigated in the future if rates decrease.

Ask potential mortgage bankers how much it would cost to modify your loan if your home’s interest rate is significantly higher than current rates. The range can be anywhere from free to thousands of dollars. There’s no guarantee that home loan interest rates will drop, but you can make sure that you can afford to refinance if they do.

The Bottom Line

The decision to buy a home should always be based mostly on your ability to afford the monthly payment, down payment, home repairs, and furnishings, while still having enough left over for an emergency fund. Always consider factors such as HOA fees and the option to pay down your mortgage if you must move quickly. Ideally, you'll be able to buy when both interest rates and home prices are low. If that’s not possible, calculate both the short- and long-term costs of a lower interest rate versus a lower purchase price. Make your move when the numbers make the most sense.