The Expert Podcast

So interest rates are going up. No longer can you get a mortgage rate at two or three percent. You're talking five, six, some types of loans even close to seven percent. But this might be the best time to finance a property—a property you're buying, not a refinance—when the interest rates are high.

Why is it? Why is it a fact that maybe buying a property with a higher interest rate is better than buying when the interest rates are low? Let's see what it looks like. Don't forget to leave your comments below and questions so we can have a discussion about these real estate topics.

So when you buy a property, there are three factors that go into your mortgage payment. One is the price of the house. Let's say you pay four hundred thousand for a house—that's the price of the house. That's what goes into your mortgage calculation.

The second factor that goes in is your down payment. If you put down twenty percent, which is a standard down payment on a four hundred thousand dollar house, that would be eighty thousand dollars. That would leave you with a mortgage of three hundred and twenty thousand dollars.

The third factor that goes in is your interest rate. That's the annual percentage rate that calculates your payment. Once you buy the house, your mortgage is issued using those three factors: price of the house, down payment, interest rate—boom. Now you have your mortgage—20-year mortgage, 30-year mortgage—and your payments. Let's say you're 2200, 2300—just a guess based on that math.

Now you pay your payments for two, three, or four years, and interest rates can fluctuate. Home values can fluctuate. But you already bought the house for 400. You're not gonna have to pay more if the price of your neighborhood goes up to five hundred thousand. You don't have to suddenly come in with another hundred thousand. That would be stupid. You paid 400 for the house and that's it. That's set in stone.

The price of the house does not change after you buy it. The interest rate on your mortgage—does that change? Well, most people don't get a variable rate mortgage anymore. It's very difficult to find one. So your interest rate, let's say, is 5.25. That's your interest rate. It stays the same. It gets locked in. It does not change.

So if interest rates go up to eight percent in the next two years, you're still at five percent. But what if interest rates go down? What if they go down to four percent or three percent? Well, you know what happens? You can refinance that mortgage. If it goes down, you don't have to do it if it goes up, but you can do it if it goes down.

So if your interest rate is 5.25 and the rates go down to three and a half, you refinance, get a new mortgage, and now your payment is lower. Higher interest rates generally will hold back price appreciation. So if you buy when rates are high, you probably are not going to have to pay a premium for a house.

House prices went up quite a bit when interest rates were two and three percent because people could afford more house. They could afford to pay more for a house because the rate was low. When interest rates go up, it puts a little bit of a throttle, a little bit of a restriction on the house price appreciation.

So if you buy when the rates are up, you get locked in on a price that's relatively low. Might be higher than it was before, but at least not way higher than it would have been if the rates were still low. And then later, if the rates go down, you can take advantage of the lower rate.

If the rates are already low when you buy the house, you can't really refinance much lower. If they're already at two percent, rates aren't going to be zero on a mortgage. Even rates at three percent—you're not going to really be able to refinance lower. And you're going to pay more for the house because the market's going to be crazy.

So if you buy a house with a five or six percent mortgage, that mortgage rate in the marketplace helped keep the value of the house lower. You may still think you're paying too much for the house—that's fine. You may still feel like it's a high price—that's fine. But just think how much higher that price would be if the rate was two percent.

Right? That five or six percent mortgage did you a favor in keeping that price from jacking up even more. So now that rate works to your advantage. Yeah, you have to pay the rate in a higher payment while that rate is high. But if in two years or five years or eight years from now the rate goes down, you can refinance and tap into that lower rate.

What about the third factor in a mortgage financing—the down payment? Can you change your down payment? Well, maybe you can. If you refinance five years from now and you have a loan balance of 320,000, let's say—what if you just saved up more money and you want to put more down payment? Well, when you refinance, put another 20,000 in and now refinance at 300,000, and your payments are even lower.

What if you want a lower down payment? What if you put down 80,000 and said, "Look, I wish I only put down 40,000 and kept the other 40,000 in the bank"? Well now refinance it with a cash-out and refinance 360 at a lower rate. Maybe your payment's the same, and now you have 40,000 cash in your pocket.

So you can change the down payment. You can change the interest rate if the market changes. You can't change the selling price—and that's a good thing, because the selling prices normally go up. So buying at a higher interest rate environment, as long as you can afford it and it's not too crazy, is not necessarily the worst thing in the world.

Plus you're only paying a portion of the difference in the rate. If the rate goes up three percentage points from, let's say, two and a half to five and a half, you're really only paying out of pocket two of those percentage points, because most people have about a 30% tax bracket deduction and you can deduct your interest payments off your taxes.

We're not tax professionals. We're not attorneys. Get good advice from both of those people before you make decisions. But interest rate is partially subsidized by the government. As a homeowner, take advantage of it. So that higher rate—yeah, you got to pay it, but some of it you'll get back on tax deductions if you're eligible to do so.

High interest rates aren't the worst thing in the world as long as you can afford it. It helps keep your price low, and your price is something that gets—once you pay, it's locked in forever. If you overpay for a house, you can never underpay. You can't go backwards. But if you get a good deal on a house, that good deal is permanent forever—and your interest rate can change, and you can take advantage of that by refinancing.