How Rising Interest Rates Impact Your Home-Buying Plans

Lucas Smith
Monday, February 17th, 2025
By Lucas Smith

Interest rates are skyrocketing, and they could crush your home-buying plans. Find out how rising rates could cost you thousands and what you can do to stay ahead.

The Cost of Rising Interest Rates

Even a small increase in interest rates can significantly impact your monthly payment and long-term costs. Here’s an example based on the average home price in Orange County ($1 million):

  • Scenario A: 20% down, 6.98% interest rate
    • Monthly payment: $5,686
    • Total interest over 30 years: $1,112,000
  • Scenario B: 20% down, 7.98% interest rate (1% increase)
    • Monthly payment: $6,233
    • Total interest over 30 years: $1,300,000

    A 1% increase raises your monthly payment by $547 and adds nearly $200,000 in interest over the life of the loan.

    How Interest Rates Affect Buying Power

    Higher rates can limit your budget due to debt-to-income (DTI) ratio requirements. Lenders consider your income, debt, and projected mortgage payment. If your DTI exceeds 49%, you may need to lower your budget or compromise on home features.

    Strategies to Get the Best Rate

    • Talk to a Lender Early: Discuss rate trends during your pre-approval process.
    • Compare Multiple Lenders: Get at least two quotes from different types of lenders (banks, mortgage lenders, and mortgage brokers).
    • Consider Adjustable-Rate Mortgages (ARMs): ARMs can offer lower initial rates but ensure you understand the terms.
    • Look for Assumable Mortgages: Some VA and FHA loans allow you to take over a lower existing rate.

    Why You Shouldn’t Wait to Buy

    While waiting for rates to drop, home prices often continue to rise. Orange County home prices increase an average of 7.5% annually. Refinancing is always an option if rates drop later.

    Special Tip to Save on Interest Rates

    Get at least two loan quotes—one from a lender recommended by your real estate broker and one from an outside lender. This comparison can help you secure the best rate and terms.

    For more real estate insights, follow our blog and stay informed about the latest market trends.