How Much Should You Care About Mortgage Rates When You're Buying a House?

When you are buying a house, you need to do all that you can to get the most affordable mortgage interest rate possible. The interest rate that you pay is the cost of borrowing. If you must pay a higher interest rate on your mortgage loan, you will end up with higher monthly payments and higher total borrowing costs over time.

But, while you should care about your interest rate quite a bit, that doesn't necessarily mean what you think it does.

Here's why you need to care about your interest rate

To understand why interest rates matter a whole lot when you get a home loan, consider how much the monthly payment would be for each $100,000 you borrow if you opted for a 30-year fixed-rate mortgage loan.

Here's what the payment would look like, depending on the interest rate you qualify for when you get your home loan:

As you can see, a higher interest rate makes your monthly payments less and less affordable. And remember, this is just for principal and interest on your home loan. Your lender may require you to pay a set sum each month that goes towards covering your annual property taxes and homeowners insurance.

Since you could add hundreds of dollars in extra monthly payments to your mortgage loan if you borrow at a higher rate rather than a lower one, paying attention to the interest that you're charged is the only logical thing to do.

What does this mean for you?

Since you need to care about mortgage rates, it's important to figure out exactly what that means.

First and foremost, you may assume you shouldn't buy a house when rates are high. That's not necessarily the case. Yes, it's ideal to buy when rates are lower. But you don't have any control over the broader economic trends that will determine when rates rise and fall. And you can't necessarily predict when rates will tumble or climb higher.

It doesn't usually make sense to put off a home purchase when you're ready to make one, just because rates are higher than they were in the recent past. By putting off purchasing, you'd be losing the chance to start building equity and you could end up paying more later if property values rise. There's also no way of telling how long you'd have to wait since you can't determine exactly when or if interest rates will fall.

You do also have the option to refinance your loan later, which means if rates end up falling in the future, you can always take advantage of them by refinancing. The reverse isn't true -- you can't go back in time and get a loan at today's rates if tomorrow's rates are higher. So, it's often better to get your loan even during a time of high rates and just plan to refinance later if you can.

So how do you cope with high mortgage rates?

Since you shouldn't let high rates affect your borrowing decision, what does caring about mortgage rates mean? Basically, it's best to do everything in your power to get the lowest rate possible, given prevailing market conditions. You shouldn't just accept the first offer on the table, but should shop around among multiple different mortgage lenders to try to get the best rate on offer at the time.

Taking steps to improve your credit and to become a more qualified borrower -- such as saving up a bigger down payment and reducing debt -- can also help you get better rates, and these steps are definitely worth taking given the big impact a high rate has on your costs.

So, you should care about mortgage rates to the extent that you change what you can to get the best rate -- but you shouldn't care so much that you put off a home purchase and end up regretting it in the end.