Housing prices are going up, and interest rates are likely to follow soon, according to the National Association of Realtors. That means a big decision if you’re thinking of buying a home. Should you take advantage of today’s low mortgage rates, even if it means spending more on a house, or hold off and hope housing prices drop as interest rates rise?

Running the Numbers

Let’s take a look based on the current average home price of $337,000. The current national average 30-year fixed-mortgage rate is 3.88%.1 Assuming no money down, the monthly mortgage payment would be $1,586.2

Now what happens if the average home price swings up or down 5% and the average interest rate goes up or down 2%?

HIGH PRICE/HIGH RATE

5% price increase = $353,850                                   

2% rate increase = 5.88%                              

Monthly payment = $2,094              

HIGH PRICE/LOW RATE

5% price increase = $353,850

2% rate decrease = 1.88%

Monthly payment = $1,287

LOW PRICE/HIGH RATE

5% price decrease = $320,150

2% rate increase = 5.88%

Monthly payment = $1,895

LOW PRICE/LOW RATE

5% price decrease = $320,150

2% rate decrease = 1.88%

Monthly payment = $1,164

                                                                                                                                                           

A 5% increase in price has little impact on affordability if the interest rate is low. That is because the extra cost is spread over the many years of the mortgage, but the numbers will vary depending on the size of the home price or interest rate increase. You must consider how both will affect your monthly payment.

Getting Closer to Home

Many other factors affect how much home you can afford, including the amount of money you can put down. Take the MakingCents Buying a Home track to learn more. You can also use the Navy Federal Credit Union Mortgage Loan Calculator to see how changes in interest rates could affect your mortgage payment.

What Affects Rates?

The Federal Reserve Board influences short-term rates, like those charged for car loans and credit cards. Although short-term rates don’t directly affect mortgage rates, the change may indirectly affect them.

Some analysts think higher mortgage rates will force housing prices to go down, but according to research reported by Bankrate.com, there is no strong link between interest rates and housing prices.3 The cost of housing may depend more on:

the strength of the economy. During the recession, people who had lost their jobs and those worried about job security tended not to buy homes. As the economy and employment rates improve, the demand for housing tends to rise. That is because buyers can afford to pay more.

housing inventory. If more people want to buy homes but there aren’t enough for sale, prices tend to rise.

neighborhoods and demographics. High-demand areas often command higher prices than similar homes in less-desirable neighborhoods.

 

1Sources: U.S. Government Census, www.census.gov (average home price as of May 2015) and Bankrate.com (national average 30-year fixed-mortgage rate as of Feb. 5, 2016).2For illustration only. No private mortgage insurance, home insurance or property taxes are included in the calculation.3Bankrate.com