Why Waiting for the Lowest Interest Rate Might Not Save You Money

Posted in Homebuyer Education

Buying your first home is a huge step, and it’s natural to want to get the best deal possible. For many first-time buyers, that means waiting for the “perfect” low interest rate. After all, a lower rate means lower monthly payments, right??

While waiting for that magical low rate might seem like a smart strategy, it could actually end up costing you more in the long run. Here’s why focusing only on interest rates might not be your best move, and how looking at the bigger picture can help you make informed home-buying decisions.

How Do Mortgage Interest Rates Work?

Let’s start with the basics. Your mortgage interest rate is essentially the fee you pay for borrowing money to buy your home. This rate is a percentage of your loan amount and directly impacts your monthly mortgage payment. Since interest rates fluctuate with the market, many first-time homebuyers try to wait for the lowest rate possible.

But there’s a catch to this approach. The interest rates you see advertised aren’t always the rates you’ll get. Your actual rate depends on several personal factors like your credit score, loan type, and the size of your down payment. Plus, even if you get the lowest rate, that doesn’t mean you’re getting the best overall deal.

Cost of Buying a Home Beyond Interest Rates

Here’s the part most first-time homebuyers don’t realize: interest rates are just one piece of the puzzle. Even if you lock in a slightly lower rate by waiting, other factors might go up in the meantime, wiping out any potential savings. Let’s take a look at some of the other key pieces of the homebuying puzzle.?

Home Price Appreciation

While you wait for rates to drop, home prices in your area could be climbing. Imagine locking in a lower rate, but now the house you want costs $25,000 more than it did a few months ago. That extra cost can easily outweigh the benefit of a slightly lower interest rate.

Also, as home prices increase, competition among buyers can intensify, leading to bidding wars or paying above asking price just to secure a home. This extra demand can drive up prices even further, making it harder to find an affordable home in your desired area. In this scenario, waiting for a slightly better rate could mean paying significantly more overall.

Down Payment and Loan-to-Value Ratio

Your down payment is another important factor. As home prices rise, you might need to save more for a down payment. Or, you may have to settle for a higher loan-to-value ratio, which can increase your monthly payments or impact your ability to secure a loan.

The loan-to-value ratio (LTV) is the percentage of the home’s value that you’re borrowing compared to how much you’re putting down. For example, if you’re buying a home for $400,000 and putting down $20,000, your loan would cover the remaining $380,000. Your LTV ratio would then be 95% (since you’re borrowing 95% of the home’s value).

A higher LTV ratio — meaning you’re borrowing a larger percentage of the home’s value — often means higher monthly payments and may require you to pay for private mortgage insurance (PMI). Lenders typically prefer a lower LTV because it reduces their risk, so a higher LTV might also affect your ability to secure the best loan terms.

Closing Costs

Don’t overlook closing costs. These are the fees and expenses you’ll need to cover when finalizing your mortgage, and they can add up quickly. On average, closing costs range from 2% to 6% of the home’s purchase price. For a $400,000 home, that means an additional $8,000 to $24,000 in costs, which should be factored into your overall budget.?

In a competitive housing market, some of these costs can increase. When demand is high and the market favors sellers, buyers often have less negotiating power. In this situation, sellers are less likely to help cover portions of the closing costs, and you may end up paying more out-of-pocket. Additionally, fees for services like appraisals and title insurance can also rise as demand for these services grows.

Other Hidden Costs of Waiting

Beyond rising home prices, down payments, and closing costs, waiting for the perfect interest rate could come with other consequences you might not see right away.

• Missed opportunities: While you’re waiting, the ideal home for you could be snatched up by another buyer. Sometimes, locking in a home you love at a fair interest rate today is better than holding out for a lower rate tomorrow — and missing out on the property that’s just right for you.
• Lost time: Every month you wait is another month you’re not building equity. Equity is the portion of your home that you truly own, and it tends to increase as home values go up over time. By waiting, you’re missing out on building wealth through your home, which could cost you down the line.

Our Recommendations for First-Time Homebuyers?

Even if you manage to snag that low interest rate, there are other factors to consider when looking at the full cost of buying a home. That’s why we don’t recommend first-time homebuyers fixate on interest rates. While lower interest rates can certainly help, they aren’t the whole picture. Here’s what we suggest you focus on first when starting the homebuying process.

Consider More Than Interest Rates

Many first-time homebuyers focus on the interest rate but overlook other important areas, like we mentioned above. For example, you might lock in a lower rate but face higher house prices or higher upfront costs, such as closing cost fees. In some cases, opting for a slightly higher rate with more favorable terms — such as fewer fees or a more flexible repayment plan — could actually save you more money in the long run.?

So, if waiting for the lowest rate isn’t the best strategy, what should first-time homebuyers do? Focus on the big picture! Your interest rate is important, but it’s only one part of the total cost of homeownership. To make the most informed decision, you’ll want to look at your full financial picture.?

When evaluating your home purchase, consider:

• The home price and how it fits into your budget.
• Closing costs, which can add to your final expenses.
• Your monthly payment, which should be manageable even if rates or taxes rise in the future.
• Building equity, which happens as you begin paying down your mortgage and your home appreciates in value over time.

Review Your Personal Finances

Your personal financial situation plays a bigger role in determining your mortgage rate than waiting for market shifts. Lenders look at factors like your credit score, income, debt-to-income ratio, and down payment size. Improving these areas will have a far greater impact on the interest rate you qualify for than timing the market ever could.

For example:

• Improving your credit score could result in a lower rate offered by a number of lenders.
• Reducing debt increases your buying power and makes you a more attractive candidate to lenders.
• Saving for a larger down payment can help you avoid private mortgage insurance (PMI) and reduce your overall loan amount, lowering both your monthly payments and long-term costs.

These personal financial improvements often yield better results than simply waiting for the market to offer slightly lower interest rates.

Find the Right Lender for You

Finding a trusted lender is such an important step in the homebuying process. Don’t hesitate to shop around and compare offers from multiple lenders. Each lender may offer different rates, terms, and fees, so it’s important to get a clear breakdown of the full costs — not just the interest rate. Inquire about the overall loan structure and make sure you understand all potential fees and penalties.?

Expert Tip: Are you wanting to buy but are worried about rising interest rates? Did you know that you can lock in an interest rate? Many lenders offer rate locks, allowing you to secure your rate while you shop for homes or finalize your loan. This way, you’re not at the mercy of rising rates while you make decisions. Rate locks do typically come with a fee, but it may be worth the initial expense. Work with your lender or another trusted advisor to see what works best for you. Here at Finally Home!, we also offer free 1:1 housing counseling to help during the homebuying process if you’d like additional guidance.?

Explore First-Time Homebuyer Programs

There are many assistance programs designed to help first-time homebuyers. These programs can offer down payment assistance, lower interest rates, or reduced fees, which can save you money even if you don’t lock in the lowest interest rate. Check with the housing and finance association in your state for information about these programs. You can also look at your local banks or community non-profit organizations for first-time homebuyer programs.?

Beside special loan programs, the government also issues loans through channels like the Federal Housing Administration (FHA) and U.S. Department of Veteran Affairs (VA). You must qualify for FHA loans, VA loans, and other government-insured loans, such as being a U.S. veteran for a VA loan. Your lender can help you determine if you’re eligible for any of these types of loans.?

To qualify for certain first-time homebuyer loan programs, you may be required to take a homebuyer education course. Great news — our Finally Home! course can fulfill these requirements for special loan programs and may help you qualify for down payment and closing cost assistance.?

Final Thoughts

It’s common for first-time homebuyers to ask, “When will interest rates go down?” The truth is, no one can predict interest rate changes with certainty. While it’s tempting to hold out for the lowest rate, waiting might not save you as much as you think. Home prices and other costs can rise in the meantime, and you may miss out on the perfect home for your family. That’s why it’s more important to focus on the overall picture of homebuying rather than just one number.

By prioritizing your personal financial health, working with trusted lenders to get a clear understanding of the full costs, and exploring first-time homebuyer programs, you’ll be in a much stronger position to make a well-informed decision — one that can save you money in the long run and make homeownership a reality.

Ready to get started on your homebuying journey? If you’re feeling unsure about where to start or want more guidance, sign up for our comprehensive homebuyer education course! You’ll get the tools and knowledge to navigate the entire homebuying process confidently, beyond only considering interest rates.