Interest Rates' Effect on the Housing Market
For Buyers

Interest Rates' Effect on the Housing Market

Peter Kim
January 18, 2024

Are you considering buying a home but worried about current interest rates? If you gain a better understanding of interest rates' effect on the housing market, you might not feel so overwhelmed purchasing a home.

Odigo Real Estate Club offers amazing agents that advocate for you when you're buying a home. They provide the following advice about mortgage rates and how to use the current state of the market to your advantage.

The Current Market State

What is the current state of the real estate market? If you look at the combination of mortgage interest rates, demand for homes, and home prices, you can get a more complete view.

Mortgage Interest Rates

While the early 2020s brought historic lows in interest rates, they have returned to normal and continue to increase. The current average federal funds rate, or the rate at which banks lend money to each other, is 5.33%. Generally, you can expect to pay an interest rate at this level or higher.

Remember that the following factors will also affect your individual mortgage rate:

  • The better (or higher) your credit score, the more likely you can obtain a lower interest rate.
  • The size of your down payment directly affects the interest rate on your mortgage. A higher downpayment lowers your interest rate because lenders know you have a higher stake in the property and pose less risk of defaulting on your loan.
  • With a higher loan-to-value ratio, or the difference between the value of your home and your loan amount, lenders see you as a riskier investment, and you'll have higher interest rates.
  • If you have a high debt-to-income ratio, lenders might worry you don't have the funds to pay your monthly premiums. They'll impose a higher interest rate to reduce their risk.


What effects do rising interest rates have on the demand for housing? When people must pay higher interest rates, it makes it harder to afford a home, and it decreases demand. That means that you'll likely experience less competition for purchasing a home, even if you do pay more for the loan you're approved for.


The law of supply and demand states that the price of something directly correlates with its demand, provided there is adequate supply. In other words, since most places don't have a housing shortage, the lower demand created by high interest rates means lower home prices too.

Tips for Buying a Home With High Interest Rates

Now that you understand interest rates' effect on the housing market, you know now is a good time to buy a home. While you must consider your individual situation, you'll likely benefit from buying a house while the prices remain low, even if you end up with a higher interest rate. The following tips can help you understand why.

Buy Now, Refinance Later

First, opt for an adjustable-rate mortgage rather than a fixed one. While it's more of a gamble if interest rates increase, you'll benefit if rates fall. For a 30-year mortgage, even a quarter of a percentage point difference in rates can save you thousands of dollars.

Whether you have an adjustable or fixed-rate mortgage, you should plan on refinancing once interest rates drop. While buying a house now and waiting for refinancing might seem like a gamble, if you can afford to make the interest payments, you'll likely benefit from the lower housing cost.

Consider Budget

When deciding to purchase a home, consider how much you can afford, not only in terms of the cost of the house but also how much emergency savings you have and where you can cut costs in your overall budget.

While we don't suggest buying a more costly property than you can afford in hopes of refinancing or lowering interest rates, you may feel comfortable dipping into your savings to make payments on higher-interest loans. If you have places where you can cut discretionary spending, such as dining out or entertainment, you might consider it a good trade-off for the security and equity that comes from owning a house.

Shop Lenders

Don't accept the first offer you get from mortgage lenders. You should shop around and see what you can obtain from at least three different lenders. You'll likely receive three different offers, and in general, the one with the lowest interest rate is best.

You can also try and negotiate with your mortgage lender using the following tips:

  • Know your credit score and history. Leverage a good score and downplay a low score.
  • Start the discussion knowing what type of loan you want and your budget.
  • Use offers from other lenders, especially a credit union, to negotiate with the lender you want to work with.
  • Consider origination fees and application fees for a more complete view of what the loan will cost you.
  • When deciding which lender you want to negotiate with, consider their level of service, ease of doing business digitally, and how quickly they respond to your inquiries.
  • If you apply for an adjustable-rate mortgage, pay attention to the length of the introductory period to better estimate your costs.

Utilize Your Agent

While it won't affect your interest rate, you can use your real estate agent to negotiate closing costs and have the seller cover some or all of them. This prevents you from rolling the costs into your loan. If you plan on paying cash for the closing costs, this frees up some money for your first month's mortgage payment.

Finding the Best Mortgage Rates

If you want to buy a home in the near future, consider using the following tips to maximize your chances of receiving the lowest possible interest rates.

Improve Your Credit Score

Improving your credit score can take time, but the better your score, the more likely you’ll receive favorable interest rates and the better negotiating power you'll have. You'll want to increase your credit score to at least 650, but buyers with a credit score of at least 740 tend to receive the best rates.

You can start improving your credit score using the following tips:

  • Increase your credit limit without increasing your debt-to-income ratio.
  • If you've paid off a negative entry in your report, ask the credit agency to remove it from your record.
  • Pay your bills on time.
  • Maintain low balances on your credit cards.
  • Use your credit cards for more purchases, provided you can pay them off completely each month.
  • Avoid opening new credit cards or accounts you don't need.

Save for a Downpayment

The higher your downpayment, the more likely you'll receive lower interest rates. If you plan on buying a house in the future, start saving for the down payment now.

Set a goal of saving at least 15% of the total cost of the home. For example, if you plan to buy a $200,000 house, aim to save a downpayment of $30,000 (200,000 x 0.15 = 30,000).

Build Employment Record

When a lender sees you have a steady history of employment, they know you'll likely have the income to pay your mortgage and view you as less of a risk.

Pay Down Debt

The lower your existing debt, the more likely you are to receive favorable mortgage rates. Ideally, you should aim for a debt-to-income ratio no higher than 43%.

Partner With Odigo Real Estate Club To Buy Your Home

Now that you know interest rates' effect on the housing market, you can determine if you should buy now. If you wait until rates drop, you'll likely end up paying more for your house, negating any savings from lower interest rates.

When you work with Odigo Real Estate Club, we leverage our expert knowledge, negotiation skills, and proven home-buying process to help you find the right home for the most competitive price. To speak with a team member, call (425) 409-3823.

About the Author

Peter Kim

Peter Kim is the owner of Odigo Real Estate Club, a leading real estate agency in the Greater Seattle area that specializes in residential, commercial, and luxury properties. With over 10 years of experience and a team of highly skilled agents, Peter brings a wealth of knowledge and expertise to the real estate space.

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