Interest rate vs. home price: Which matters more?

If you’re looking to buy a home, your budget will depend on the balance between interest rates and house prices. The home price is what you pay for the property, while the interest rate is the amount your lender charges you to borrow the money for a mortgage. Here’s a breakdown of how both factors shape home affordability and what you can buy based on market conditions.

Do interest rates affect house prices?

Yes, interest rates affect house prices inversely. Higher interest rates can reduce demand by making borrowing more expensive. Sellers may need to reduce their asking price to attract buyers. Lower interest rates make borrowing money cheaper, so sellers can set higher asking prices without deterring offers.

The correlation between mortgage rates and housing prices isn't absolute. Inventory shortages, local market conditions, and broader economic factors like inflation also affect the housing market.

Economic factors, such as the federal funds rate, also affect mortgage interest rates. You can check mortgage rates regularly to understand current trends.

Interest rates vs. home prices historical chart

Comparing interest rates vs. house prices provides helpful context for understanding how the market has evolved.

The table below compares historical mortgage rates for 30-year fixed-rate mortgages and median sales prices over the decades. While rates are currently higher than they were at the height of the COVID-19 pandemic, from a historical perspective, you'll see that rates are relatively low compared to other points in the last 50 years. This information is based on data from the Federal Reserve Bank of St. Louis.

How are home buyers affected by interest rates and house prices?

Interest rates and house prices both affect home buyers. If interest rates or housing prices are high, first-time buyers may be hesitant or unable to afford a home.

Home prices and interest rates affect two key financial components of how much house you can afford: How much you need for the down payment and your monthly mortgage payment.

Down payment

Most mortgages require a minimum down payment, which is expressed as a percentage of the purchase price. The higher the purchase price, the larger the down payment.

Higher interest rates make borrowing more expensive, which can limit the amount you can afford to borrow.

The minimum down payment depends on your loan type. For example, a conventional loan requires a minimum down payment of 3%, but you'll have to pay for private mortgage insurance (PMI) until you have 20% home equity.² FHA loans' minimums vary from 3.5% to 10%, depending on your credit score, while VA and USDA loans require no minimum down payment.¹ Rocket Mortgage currently doesn't offer USDA loans.

Monthly payment

The monthly payment on your mortgage depends primarily on how much you borrow and the interest rate you pay.

The amount you need to borrow is the purchase price minus your down payment, so higher prices mean you'll need to borrow more.

Higher rates increase the amount of interest you'll pay each month toward your mortgage.

Home prices vs. interest rates: which is more important?

Both the home's price and the interest rate you're offered on your mortgage are important factors that affect your monthly budget and long-term costs.

Let's compare two scenarios, assuming a 20% down payment on a 30-year fixed loan.

Scenario 1: Lower interest rate

Say you're buying a $400,000 home with $80,000 down, financing $320,000 at 6.625%. Your principal and interest payment is $2,049. Over 30 years, you'll pay $417,638 in interest.

If you were to borrow the same amount at 6% interest, your monthly payment would be $1,919.56, saving you $130 a month. You'd pay $370,682 in total interest, saving you $46,956 over the full loan term.

Scenario 2: Lower house price

Now, imagine buying a $350,000 home with $70,000 down, financing $280,000 at 6.625%. Your payment is roughly $1,793. Over 30 years, you pay about $365,433 in interest.

Compared with buying the same home for $400,000, you'd save $10,000 at closing and pay $256 less per month. You'd save $52,205 in interest over the full loan term.

You can use Rocket Mortgage calculators, including our mortgage calculator, to help you understand how much house you can afford.

FAQ

Here are answers to common questions about how interest rates and home prices are related.

Do higher home prices mean interest rates are lower?

Not automatically. Historical data show that higher home prices tend to correlate with lower interest rates. However, low housing inventory can keep home prices high even when rates climb. Every real estate market is different, and that means prices may be higher in your area even if mortgage rates are high. 

Can I increase my chances of getting a lower interest rate?

A higher credit score can help you get a lower interest rate. If your credit score is low, focus on paying off your existing debts and making on-time payments each month. Also, many lenders offer a lower interest rate to borrowers who make a larger down payment.

Should I buy a house when interest rates are high?

If the monthly payment comfortably fits your budget, it can be worthwhile to buy a home even if interest rates are high. You can refinance later if rates fall.³ However, you should not buy if you can’t afford the up-front costs and the monthly payment.

The bottom line: Weigh both home price and interest rates

Home affordability depends on both the interest rate you get and the price you pay for a home. Your home price dictates your short-term cash needs, while your interest rate significantly sways the long-term impact on your total loan cost and your monthly payment. Evaluate your personal budget, goals, and priorities by comparing different price and rate scenarios.

Ready to explore your options? Apply online today with Rocket Mortgage.

¹ Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.

² The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

³ Refinancing may increase finance charges over the life of the loan.

Important Legal Disclosure:

Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/rates, where current pricing and various loan terms are made available.