3 benefits of buying a home when interest rates are high

While high interest rates affect overall housing affordability, Moneywise found there are a few surprising advantages of a cooler market.

The downsides are obvious: For buyers, a higher rate translates into higher monthly payments, which affects overall affordability. For a median-priced home, recent interest rate hikes have added $300 to $400 to the average mortgage per month. Plus, it may be more difficult to get approved for a higher loan, so that dream home may be just out of reach.

While there's speculation as to whether rates will continue climbing, level off, or start to decline in the coming months, many potential buyers are left wondering if they should wait it out or jump in.

In 2020 and 2021, interest rates dropped to historic lows when emergency measures were introduced during the pandemic, pushing mortgage rates below 3%. Now, they're hitting the highest rates we've seen in more than two decades, thanks to the Federal Reserve's efforts to combat inflation.

But mortgage interest rates aren't just influenced by the inflation rate; they're also impacted by the state of the economy and the pace of job creation.

Throughout 2023, mortgage interest rates have trended upward in line with climbing interest rates—and, in part, due to uncertainty around the debt ceiling negotiations in the spring. This was slightly alleviated when President Joe Biden signed a bill in June that lifted the nation's debt ceiling (averting a default).

Despite that, mortgage interest rates have continued to tick up. As of mid-October, the current average on a 30-year fixed mortgage rate reached 8.214%, according to the Moneywise mortgage rates index. For investment properties, the rate is typically 1-2% higher since rental properties represent a higher risk for lenders.

While high rates continue to affect overall home affordability, it isn't all bad news. Here are three reasons to consider buying a home when interest rates are high.

Benefit #1: Lower housing prices — in some markets

Higher interest rates typically have two effects on the housing market that can help drive down prices: They price some buyers out of the market, which is good for the buyers who remain, and they typically have the effect of putting downward pressure on housing prices, which is good for buyers.

But, while home prices started to decrease—albeit modestly—earlier this year, prices have since risen. That's because, despite higher mortgage interest rates, housing inventory remains limited. Some sellers are choosing to stay put so they can hold onto their low locked-in rate, while new home construction continues to be negatively impacted by supply chain issues, rising costs, and labor shortages.

In fact, housing prices rose 4.3% between the first quarters of 2022 and 2023, according to the Federal Housing Finance Agency House Price Index (FHFA HPI). However, seven states saw price declines, including Utah at 4.35%, California at 2.86% and Washington at 2.62%. Two regions also saw declines: the Pacific division (down 2.4%) and the Mountain division (down 0.1%).

Housing affordability may still be out of reach for some buyers in certain states or regions, but in others, buyers may be able to negotiate better prices.

Benefit #2: Less buyer risk

In 2020-2021, it was a seller's market, and buyers were chasing a limited supply of housing inventory. Highly desirable homes were selling the day they hit the market—often with multiple offers pushing prices well over listing price.

That meant a lot of buyers were waiving offer contingencies. Why? Because offers with fewer contingencies present a better chance of being chosen by the seller.

However, among the contingencies being waived were two important ones: the inspection and the appraisal. That puts buyers at risk of purchasing a money pit, or losing money if they back out of the deal after discovering potential problems.

When rates are high, there are fewer buyers to compete with and houses tend to stay on the market longer, so inspection and appraisal contingencies are re-emerging. And that's a good thing for buyers.

The inspection

Purchasing a home involves a lot of unknowns—and that carries risk. You're buying a tangible asset that's subject to wear and tear. Murphy's Law would have it that as soon as you move in, a major (and expensive) system like the HVAC will fail.

In a normal market, the buyer has an opportunity to inspect the home before fully committing. If they don't like what the home inspection shows, they can back out of the contract.

This is an important step in understanding what you're buying. A licensed inspector will provide details on the age and condition of important structural and mechanical elements that a homebuyer needs to know. For example, how many years of life is left on the roof? Is the HVAC system functioning properly? Does the foundation have a crack that threatens the home's stability?

Homebuyers and real estate agents aren't trained to look for defects, but an inspector is. While the results of an inspection aren't normally an opportunity for renegotiation of the offer price, it could serve that purpose if conditions are discovered that would require substantial investment.

The appraisal

The market in 2020-2021 favored cash buyers and those who could afford a substantial down payment. That's because bidding wars were pushing prices well over the seller's asking price, meaning the home wouldn't be appraised for the offer price.

For borrowers, that's a problem. When securing a mortgage, the lender often requires a well-researched value assessment by an independent licensed appraiser. After all, they want to ensure the home is worth the amount of money they agree to finance.

As a result, only buyers with additional cash to pay the difference between offer price and appraised price were able to compete, as sellers would only accept an over-listing price offer if the buyer could sign an appraisal gap addendum.

Today's higher rates haven't eliminated bidding wars. But, in general, buyers may have more time to consider their options—and feel less pressure to take unnecessary risks.

Benefit #3: Building equity

For some, buying a house is a financial investment. For others, it's a place to set down roots. Regardless, if you're ready to own a home, purchasing sooner rather than later means you can start building equity now—even if that means you may have higher costs in the short term.

After all, there's no guarantee that rates will drop any time soon. So, if you don't want to put your life plans on hold—say, to move to another city for a better job, or to be closer to an aging parent—then it may not make sense to wait. And, if you're currently renting, you've probably seen your rent increase, so you may prefer to build equity in your own home rather than pay higher rent.

Should you buy a home now?

While there's some concern about a housing market crash, agents who have their boots on the ground aren't seeing an imminent crash, but rather a much-needed market correction. Housing inventory is still low, while demand from new buyers is strong—and lending is much stricter than it was the last time we saw a housing collapse, during the 2008 financial crisis.

These days, many homeowners have positive home equity, so the situation is quite different from 2008. Indeed, existing home prices are expected to remain mostly steady, according to forecasts from the National Association of Realtors (NAR), with the nation's priciest region—the West—seeing a reduction in prices.

If you can wait at least 12 to 24 months to purchase your home, that might not be a bad decision. If inflation has subsided by then, the Fed is likely to begin reducing interest rates. At that point, home prices may be slightly lower than they are today, while interest rates may be similar.

But there's no guarantee if and when rates will drop. And if they do drop, there will be plenty of pent-up demand, which could lead to more competition and more bidding wars. Weighing the above benefits can help you make the best decision for your needs.

Buying a home while interest rates are high

It's natural to think of rising interest rates as bad news for homebuyers. After all, higher rates mean higher monthly payments, while taking on the same amount of mortgage debt.

But that doesn't mean there isn't a silver lining to buying when rates are high. There's likely to be less buyer competition for the home you want, plus the potential that higher rates will provide downward pressure on sales prices.

And you can always refinance when rates come down again, provided that your income and credit score remain strong. Or you may want to consider taking out a variable-rate loan to start with, so you can potentially lower your rate over time without having to take out a new loan and paying closing costs.

This story was produced by Moneywise and reviewed and distributed by Stacker Media.