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Which is more important, your interest rate or house price?

Tue Aug 6, 2024

When it comes to buying and owning a house, two significant variables will impact how much you spend on your mortgage: home prices and interest rates. While house prices are the more obvious factor determining how much you pay over the life of the loan, interest rates will also play a crucial role in the total cost of your mortgage.

This leads to an essential question for home buyers: Is it better to buy a less expensive house with a higher interest rate or a more expensive house with a lower interest rate?

Here’s what you need to know about the relationship between interest rates and house prices and how they affect your mortgage payments.

Dig deeper: When will mortgage rates decrease?

In this article:

Deciding whether to prioritize a low home price or mortgage interest rate is more than just a simple mathematical question. That’s because there tends to be an inverse correlation between home prices and interest rates in the housing market. Specifically, home prices tend to be lower when interest rates are higher, and home prices typically go up when interest rates are low.

This relationship involves the economic principle of supply and demand. In this case, interest rates can affect the demand for homes in the housing market. Lower interest rates generally mean increased demand for houses, leading to home sellers setting higher home prices. On the other hand, higher interest rates can reduce the demand for homes, so home sellers lower their prices to entice potential buyers, and home values decline.

Learn more: When will housing prices drop?

How interest rates and house prices affect affordability

Calculating the affordability of a home depends on three different aspects of the home sale: the down payment, the monthly mortgage payment, and the lifetime cost of the home loan. Here’s how interest rates versus house prices affect each of those factors.

Conventional loans require a down payment. Home buyers who want to avoid paying for private mortgage insurance (PMI) must put down at least 20%, although mortgage lenders may accept as little as 3% down on conventional loans. The typical down payment in Q4 2024 was 16.3% (a median of $63,188), according to a study by Redfin.

If you purchase a home with a lower price but a higher interest rate, your down payment can be more affordable. For example, let’s say you purchase a $220,000 home while interest rates are high. You can put down a 20% down payment, or $44,000, and get a 30-year fixed-rate mortgage with a 7.3% interest rate.

But if you waited for interest rates to fall before buying a home, the same house may now be selling for $300,000. Although 30-year mortgages may now have interest rates as low as 6% because you waited, you would need $60,000 to make a 20% down payment and avoid PMI.

Your monthly mortgage payment depends on several factors, including how much you borrow and the interest rate on your loan. For a $220,000 home purchase with a $44,000 down payment and 7.3% interest rate, your monthly payment toward the mortgage principal and interest will be approximately $1,207.

If you wait until rates fall to 6% and purchase the home for $300,000, you must find another $16,000 to make a 20% down payment of $60,000. If you can afford the higher down payment, your monthly mortgage payment will be approximately $1,439, which means you’ll pay about $230 more per month than if you’d purchased the home at a lower price and higher interest rate.

However, let’s assume you can’t afford the $60,000 down payment. If you buy the home at $300,000 with a $44,000 down payment, you will be on the hook for PMI until you have built up at least 20% equity in the home.

If you pay 1.5% in PMI, your monthly mortgage payments (principal + interest + PMI) will be approximately $2,175 for the first four-and-a-half years. At that point, you will have built up 20% equity and are no longer responsible for PMI. Then, your monthly payment will drop to $1,855 for the life of the loan.

In this case, waiting until the rates decrease will result in a monthly payment that’s $648 to $968 higher.

Note: These monthly mortgage payments do not include homeowners insurance, property tax, or homeowner’s association (HOA) dues. To get even more accurate numbers, use Yahoo Finance’s mortgage calculator.

You may feel the pain of the down payment and monthly payments in the short term, but the lifetime costs of your loan are also an important factor in your housing affordability. This is where interest rates can make a big difference.

For example, the $220,000 home with a $44,000 down payment and a 7.3% interest rate on a 30-year mortgage will cost $258,378 in interest over the life of the loan — on top of the amount you borrow.

But waiting until rates fall to 6% and the home price rises to $300,000 will change your lifetime costs. If you put down $44,000 on a 30-year mortgage and must pay PMI, your lifetime loan costs are approximately $314,107 — on top of that original $300,000 — broken down into $17,507 in PMI costs and $296,600 in lifetime interest paid.

In this case, you would have been better off buying the house at a lower price with a higher interest rate, saving over $55,000 over three decades.

But what if you can afford the 20% down payment of $60,000 and avoid PMI? On that 30-year home loan with a 6% interest rate, your lifetime interest paid is $278,012 with $0 paid in PMI. You will save roughly $18,500 in interest over the life of the loan than if you’d made a lower down payment, plus the $17,507 saved by skipping the PMI.

Interest rates, home price, down payment, PMI — all individual factors that add up to the total cost of owning your home. It can get confusing, so let's break it down with a chart.

Let’s look at the three examples we’ve been discussing:

  • $220,000 house with a 7.3% rate and 20% down payment ($44,000)

  • $300,000 house with a 6% rate and 20% down payment ($60,000)

  • $300,000 house with a 6% rate and 14.7% down payment ($44,000)

In this case, buying the less expensive home with the higher interest rate saves you money on your down payment, PMI, monthly mortgage payments, and total cost. But keep in mind that the numbers will depend on your exact interest rate and house price. The lower house price won’t always beat the lower rate, especially if you don’t have a 20% down payment in either scenario.

Learn more: Should you buy a house in a recession?

Remember when we said that home prices typically drop when interest rates rise? Well, the real estate market of the past few years has bucked that trend.

From Q1 2020 to Q1 2025, the average sales price for a single-family home in the U.S. increased from $383,000 to $503,800, according to data from the Federal Reserve Bank of St. Louis. More current data from Redfin shows the median price for single-family homes sitting at $440,913 as of May 2025 — a 0.7% increase compared to 2024. During this same time, interest rates have also consistently been on the rise — from sub-3% in late 2020 and early 2021 to the high 6% range as of June 2025.

So, if you’re considering holding off on a purchase until rates or home prices dip, that strategy could seriously backfire, said Casey Gaddy, a real estate agent based in Philadelphia, via email.

“The reality is, nobody can quite forecast where the market’s ultimately headed,” said Gaddy. “That’s why I counsel buyers to work with their agent and lender on strategies that work today.”

Instead of taking a risk at forecasting the market and ending up on the wrong side of the gamble, Gaddy recommended that buyers work with their real estate agent and mortgage lender on strategies that fit the current market. He offers a seller-paid rate buydown as an example.

“Instead of negotiating $10,000 off the purchase price of that $300,000 home — which saves you $10,000 — ask the seller to put that $10,000 toward buying down your interest rate,” said Gaddy. With his example, lowering your interest rate from 6.5% to 5.5% through a rate buydown with discount points could save you as much as $70,000 over 30 years.

For buyers who know they won’t be making their current purchase their forever home, Gaddy suggested asking about a 3-2-1 rate buydown. “This lets you enjoy a much lower rate the first few years — saving you thousands up front — without paying for a long-term rate you won’t use,” Gaddy said.

In typical housing markets, interest rates and housing prices have an inverse relationship. When housing prices increase, it’s common for interest rates to fall and vice versa. However, the 2025 housing market suffers from a tight supply where buyers outnumber homes for sale. This creates an environment where home prices continue to rise and interest rates remain steady, creating challenges for buyers — especially first-time buyers seeking affordable homes.

Historically, home prices increase when interest rates drop as more buyers compete for the same number of homes for sale. More buyers in the market creates a “seller’s market,” whereby sellers don’t need to reduce prices or negotiate as much due to having multiple offers.

If you have the financial means to buy a home now, including the income, down payment, and financial stability, you may want to make the jump to homeownership today. Waiting for a recession could be a fool’s errand, as there’s no guarantee that one is around the corner. While you wait, home prices could increase — especially since they’ve been on a steady climb since 2020. If you’re worried about interest rates, it’s important to remember that you can always refinance to a lower rate in the future to save on borrowing costs.

This article was edited by Laura Grace Tarpley.