What happens with real estate prices when interest rates ultimately fall?

It’s no surprise that interest rates drive the housing market. If more people can buy a home, more demand is created and more demand drives housing prices up, which subsequently results in gaining home equity. Following are the dynamics that transpire in the market when interest rates come down…

Homeowners stand to gain more equity

Here is how and why… when you own a home your equity is defined as the current market value, less whatever you owe on the property. If the property rises in value, you subsequently have more equity thereby making you wealthier—home equity as a driver of the net worth. When you have more equity, doors begin to open, and you start having more financial choices with regard to investments, planning, borrowing, and debt management. More specifically with more equity in your home, your loan to value meaning how much you owe on your home to what the home is worth drops when this number drops you become more lendable and more creditworthy. When you’re more creditworthy, you get better terms to borrow money. When this occurs, you also can refinance, lower your monthly payment, pull cash out of your property, pay off debt to home improvement, or perhaps buy additional real estate with sound leverage. All of this is a byproduct of interest rates dropping fueling demand. When rates drop all the above-described options become available to you as a homeowner. Additionally, you’ll get the ability to potentially sell the home and get more equity, and if it’s a primary home and you’ve lived there two out of the last five years you have up to a $250,000 capital gains exclusion.

How equity is created by forwarding you a financial benefit

Equity is created when you pay down the principle of your mortgage. Home equity is single-handedly the biggest driver of wealth in America within housing—home appreciation. Typically, on average homes appreciate 1 to 2% per year. Regardless of interest rate movement, that typically occurs and has throughout history. However, this can be a bit skewed when interest rates are higher. When interest rates come down people spend because their cost of funds is lower. Add in stronger demand for housing and you have a recipe for wealth accumulation. Demand increases prices when the prices rise and homes sell for over asking other homeowners who reap all the benefits.

When you purchase a home, you get to write off all your interest (too 800k on a primary home) and property taxes, you reap pay the loan down benefit working for you plus you get the home equity. So, there are four drivers of wealth just by buying a house alone independent of where current mortgage rates are. Then when you factor in interest rates, coming down in the future, all of these benefits, amplify and become enhanced further, opening more doors that could result in making you more wealthy faster.

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RELATED MORTGAGE ADVICE FROM SCOTT SHELDON

When buying a home, it’s natural to want the lowest mortgage rate possible. But sometimes, chasing a slightly better rate from another lender—especially after your offer has already been accepted—can backfire in a big way. Let’s walk through a real-world scenario. You’ve got an offer accepted on a house. You’re working with a lender who has you approved, documents in underwriting, and a 21-day close of escrow in place. Everything is moving forward. Then you hear from another lender offering a rate that’s 0.25% lower, with slightly better closing costs. It’s tempting. But before you make a jump, here’s what you need to consider. Switching Lenders Comes with Time Costs When you pivot to a new lender mid-contract, they’ll need to: Re-underwrite your entire loan, Order a new appraisal, Disclose and sign new loan documents, Submit the file for final loan approval, Schedule and fund closing—all over again. This doesn’t happen overnight. Even in ideal circumstances, the new lender is likely going to need at least 25–30 days to close. If you’re in a fast-moving or competitive market, this is a real problem. Most sellers won’t grant a contract extension just because you’re switching lenders. So, what happens next? A Contract Extension Can Jeopardize Your Deal Asking for a contract extension means the seller must agree to delay closing. But that delay introduces risk—especially if the seller has backup offers or simply wants certainty. They may not grant the extension. Or worse, they could cancel the deal outright and take another buyer’s offer. Even if the seller agrees to extend, your earnest money and negotiation power could take a hit. And for what? A slightly lower rate that might save you $50 to $75 a month? Mortgage Rates Aren’t as Far Apart as You Think Here’s the truth: all mortgage lenders get their money from the same place—the bond market. The pricing differences between lenders usually range from 0.125% to 0.25% in rate on any given day. If one lender seems to be offering dramatically better pricing, the first thing you should ask is: How? Head over to FreddieMac.com and check the average 30-year fixed rate posted weekly. This is one of the most reliable benchmarks for where rates truly stand in the market. If a lender is quoting you a rate that’s well below that average, ask for the details: Are they charging extra points? Is this a teaser rate with a prepayment penalty? Is it based on a different loan product or risky structure? Often, what sounds “too good to be true”… is. Consider the Bigger Picture Think long-term. If you’re financing $600,000, a 0.25% lower rate may reduce your payment by roughly $75/month. But what if you lose the house and have to start over? That monthly savings doesn’t mean much if you’re outbid on your dream home or lose your deposit. Also, remember: you’re not going to keep this rate forever. Today’s homebuyers typically refinance when rates drop by about 0.75% or more. So if rates fall within the next year or two, you’ll likely be refinancing anyway. Instead of paying extra points now or risking the entire deal for a minor monthly savings, it may be better to accept a slightly higher rate—knowing you’ll refinance when the time is right. The Real Risk Isn’t the Rate—It’s the Delay When shopping for a home loan, don’t just ask, “What’s your rate?” Ask: Can you close on time? Is this rate sustainable or based on hidden costs? Will switching lenders delay or jeopardize my contract? A home purchase contract is a binding agreement between you and the seller to perform within a set timeframe. If you can’t meet those dates because you're chasing a slightly better rate elsewhere, you may want to reconsider if now is the right time to buy. Final Thoughts Yes, interest rates matter. But execution matters more. Before making a switch mid-transaction, talk to your lender. Have an honest conversation about pricing, timelines, and strategy. You might find that staying the course, securing the house, and planning to refinance later offers a better path to financial security. Want to Know Your Options? Let’s compare rates and strategies the smart way—without risking your dream home. 👉 Click here to get a custom rate quote today.

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