Interest Rate vs. Wealth Generation

Mortgage interest rates get a lot of attention.

That's understandable. The interest rate affects the monthly payment and the overall cost of financing a home, so it absolutely deserves to be part of the conversation.

But recently, I heard the phrase "Interest Rate vs. Wealth Generation," and I thought it raised an interesting question.

Interest Rates Matter — But They're Only One Part of the Decision

When I speak with someone considering buying a home, one of the first questions is often:

It's an important question.

But I think an equally important question is:

Those are two very different conversations.

One focuses on the cost of borrowing money today. The other focuses on what owning the property could potentially mean to your overall financial picture over time.

Neither should be considered without the other.

What Have the Last Few Years Taught Us?

Over the past several years, mortgage rates increased considerably from the unusually low levels we experienced earlier in the decade.

Understandably, some potential homebuyers decided to wait, hoping that mortgage rates would eventually move lower.

But something else was happening at the same time.

Despite higher mortgage rates, home values nationally and in many Southern California communities continued to increase.

That certainly doesn't mean everyone should have purchased a home. Real estate markets vary, home values can rise or fall, and everyone's financial circumstances are different.

It simply illustrates why focusing exclusively on the mortgage rate can sometimes leave out an important part of the financial picture.

What Happens While You're Waiting?

Suppose someone is financially prepared to purchase a home but decides to wait solely because they hope mortgage rates will eventually be lower.

Waiting may turn out to be the right decision.

Rates could decline. Home prices could change. The buyer's financial position could improve. There are plenty of legitimate reasons why waiting may make sense.

But there is also a potential cost of waiting that deserves consideration.

During that time, a buyer may continue paying rent rather than making payments toward a home they own. A property they could purchase today may become more expensive, and they may postpone the opportunity to begin building equity through homeownership.

None of these outcomes is guaranteed.

A Lower Rate Doesn't Necessarily Mean a Lower Cost

Here's something that can easily get overlooked.

Imagine finding the right home today but deciding not to purchase because you're waiting for a lower mortgage rate.

If rates eventually decline but the price of that same type of home has increased, you could end up borrowing more money even though you're borrowing it at a lower rate.

Conversely, home values can decline as well.

That's why trying to perfectly time both mortgage rates and real estate prices can be extremely difficult.

Rather than trying to predict the future, I prefer looking at the numbers we know today and then considering several reasonable scenarios for tomorrow.

Where Does Wealth Generation Enter the Conversation?

Homeownership can potentially create wealth in a few different ways.

As mortgage payments are made, a portion may reduce the principal balance and increase the homeowner's equity.

If the property appreciates over time, that may create additional equity as well.

And for someone currently renting, purchasing a home can redirect a housing expense toward an asset they own.

Of course, home values aren't guaranteed to increase, and homeownership also comes with property taxes, insurance, maintenance and other expenses.

That's why I believe a better question may be:

Today's Mortgage Rate May Not Be Forever

There is another consideration that I think is important.

When you purchase a home, you establish the purchase price of the property.

The mortgage financing may have more flexibility over time.

If interest rates decline in the future, a qualified homeowner may have an opportunity to refinance if the numbers make financial sense.

There is never a guarantee that refinancing will be available or beneficial, so I wouldn't recommend purchasing a home based solely on the assumption that you can refinance later.

But it is worth understanding that the original mortgage doesn't necessarily have to be the mortgage you keep forever.

This Isn't About Convincing Someone to Buy

I think this is an important distinction.

There are absolutely situations where waiting to purchase a home is the better financial decision.

Maybe the monthly payment isn't comfortable yet. Maybe additional savings are needed. Maybe someone's employment or income is changing. Or maybe they simply haven't found a home they want to own for a meaningful period of time.

Those are all good reasons to wait.

But waiting solely for a particular interest rate deserves a little more analysis.

Look Beyond the Rate

Rather than asking only, "What interest rate can I get?" I encourage clients to also consider:

• What will my total monthly housing expense be?
• How long do I expect to own the property?
• How much cash will I need for the purchase?
• What might continuing to rent cost during that same period?
• How could principal reduction affect my equity?
• What happens if home prices rise—or decline?
• Does this purchase fit comfortably within my overall financial goals?

Those questions give us a much more complete picture.

Sometimes Running the Numbers Changes the Conversation

This is one of the reasons I like preparing different financing scenarios for clients.

We can compare purchasing today with waiting. We can look at different down payments, monthly payments, estimated cash requirements and longer-term costs.

Most importantly, we can discuss how each option fits into the client's broader financial goals.

My job isn't to tell someone when they should buy a home.

It's to provide enough information so they can make that decision with confidence.

And sometimes that begins by looking beyond today's mortgage rate and considering the bigger financial picture.