Much to the surprise of homebuyers, falling interest rates may be a mixed bag.

Yes, you heard that correctly. How come?

The price of all financial assets and interest rates are closely related.

Excluding other factors, they tend to move in opposite directions.

That’s why I recently spoke to Yaël Bizouati-Kennedy at GOBankingRates about what falling interest rates may mean for homebuyers.

In short, it’s complicated.

It’s “The Good, The Bad, and The Ugly”.

The Good - Assuming prices remained flat, lower mortgage rates mean buyers could purchase more house (i.e. bigger, better), or spend less each month (i.e. lower payment).

The Good – Lower rates also mean cash buyers have less of an advantage over borrowers, as interest makes up a smaller part of the total cost for those seeking a mortgage.

The Bad – Many people carrying a low rate mortgage have been sitting on the sidelines, refusing to switch to higher cost financing (PRO TIP: This isn’t a unique idea, as lower rates is likely to increase buyer competition).

The Ugly – In the absence of a recession, and while demand is strong and inventory limited, it’s possible prices keep rising and buyers remain stretched, AND with fewer opportunities to refinance later.

Here’s an example.

If you had a 30 year mortgage of $1M, with a 7% rate, the payment would be $7,377 per month.

If you had a 30 year mortgage of $1.81M, with a 3% rate, the payment would be the same.

So, assuming the houses were identical, which would I pick?

The first one, with a higher rate, hands down.

Of course, there are no identical comps in real estate, ever.

But some are always relatively close.

If you picked the first you’d have a smaller loan balance to repay, better opportunities to refinance, AND potential appreciation if interest rates declined.

That’s why falling rates is a mixed bag.

If you’re considering a real estate transaction, let’s have a conversation.

This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.