You Might Be Shocked by How Much Cheaper It Is to Buy a Home Compared to Last Year

Many would-be home buyers have stayed on the sidelines over the past couple of years, as high home prices and rapidly rising mortgage rates combined to make homeownership far less affordable for the average American.

However, despite persistent high home prices, homeownership has become significantly more affordable over the past year due to the falling interest rate environment. And you might be shocked at how much of a difference a change in mortgage rates can make.

Home prices haven't cooled off

You might be surprised that I'm calling homes more affordable, especially because home prices went up over the past year. According to Zillow, the average U.S. home value is currently $361,282, which represents a 2.9% gain over the past year.

Doing some math, this means that the average home in the United States was worth $351,100 a year ago. So, why is it more affordable to buy right now?

Mortgage rates make a big difference

The short answer to why homes are more affordable now is that the average mortgage rate has cooled off considerably from the generational highs we saw in 2023. In October 2023, the average 30-year mortgage rate peaked at 7.90%, according to the Mortgage Bankers Association.

As of Oct. 2 of this year, the average 30-year mortgage rate has retreated to 6.14%. This is about double the average mortgage rate at the start of 2022, so home affordability is nowhere near where it was a few years ago. But this change can still make a big difference in your costs.

Consider this example. As mentioned, the average home in the U.S. was worth $351,100 a year ago. At a 7.9% 30-year mortgage rate, and assuming a 20% down payment, the monthly principal and interest payment would be $2,041, according to Motley Fool Money's mortgage calculator.

Now, even though the average home is worth about $10,000 more, the lower average mortgage rate of 6.14% would generate a monthly principal and interest payment of $1,760 -- or $281 less than you'd pay for the same home a year ago.

To be clear, these payments don't include property taxes or insurance, which are typically paid along with the mortgage. But a monthly payment of nearly $300 less can make a significant difference in home affordability for many people. After all, savings of $281 per month is a savings of $3,372 in interest per year, or more than $101,000 over the life of a 30-year mortgage loan.

To be sure, 6.14% is just the average mortgage rate. Check out our top mortgage lenders to get personalized rate quotes right now.

Will mortgage rates continue to fall in 2025?

To be perfectly clear, nobody can accurately predict what mortgage rates will be at any given point in the future, and I'm certainly not an exception. And although the Federal Reserve recently cut its benchmark interest rate and is expected to do so several more times over the coming months, that doesn't automatically mean mortgage rates will fall further. In fact, a big reason why rates have already fallen so much is because of the current interest rate expectations.

Having said that, most experts believe that (assuming the Fed's rate cuts proceed as expected) mortgage rates will continue to gravitate lower. For example, Fannie Mae predicts that the average 30-year mortgage rate will drop to 5.7% by the end of 2025.

While rates could indeed fall further, the point is that it has become much more affordable to buy the average home in the United States compared with a year ago. And if rates continue to drop, it will get even better. But that doesn't mean you need to wait. If you can afford the monthly payment on a home right now, you can go ahead and pull the trigger and simply refinance your mortgage if rates end up falling further.