Worried About High Mortgage Rates? Warren Buffett Thinks You Shouldn't Be

The average 30-year fixed-mortgage interest rate is 7.72% as of early October, according to Mortgage News Daily, which is the highest level in 23 years. This has been a result of a combination of factors, but especially the Federal Reserve's aggressive raising of benchmark interest rates. With stronger-than-expected economic data recently, many experts are worried that the Fed will have to continue raising rates, which has put upward pressure on consumer interest rates like mortgages.

Homeownership is far more expensive

Not only have mortgage rates spiked higher, but home values have held their gains of the past few years for the most part. The average home price has increased by 41% since mid-2020, when the average mortgage rate was about 3%.

A home that would have cost $400,000 in 2020 would have come with a monthly principal and interest mortgage payment of $1,349, assuming a 20% down payment. Today, the same house would have a mortgage payment of $3,223. That's a big difference.

Why Warren Buffett doesn't think you need to worry

In a 2017 CNBC interview, Warren Buffett said that a mortgage is a great financial instrument, which might come as a surprise because he's generally very opposed to consumer debt. But with mortgages, he makes an exception for two reasons.

First and most importantly, a mortgage can be refinanced quickly and easily if rates fall. As Buffett says, "It's a one-way renegotiation. It is an incredibly attractive instrument for the homeowner and you've got a one-way bet."

In other words, if you get a 30-year mortgage with a 7% fixed APR, that is the highest your borrowing costs will be on your home for the next three decades. If rates spike even higher to 10%, your monthly payment stays the same. But if rates plunge to 5%, or even lower, you can simply refinance with a mortgage lender and take advantage. While nobody can predict the future with 100% accuracy, it's fair to say that there's a strong probability that at some point in the next 30 years, the average mortgage rate will be below current levels.

In addition, mortgages have relatively low interest rates compared with other types of consumer debt like credit cards and personal loans. As long as the rate you can get on a mortgage is less than what you could expect to earn from long-term investments, it can be worth using a mortgage even if you can afford to pay cash for a house. Historically, the S&P 500 has delivered 9%-10% annualized returns over long periods, so even with the recent spike in mortgage rates, we're still well below that range.

Take your personal situation into consideration

Of course, there's the caveat that you need to be able to afford the mortgage payment as it is now. Don't sign on for a housing payment you can't manage with the assumption that you'll be able to quickly refinance. But if you can afford to make the payments at today's high mortgage rates, it could still be a smart time to buy a home.