3.5%, 4.0%, 4.5%, 5.0%...These might seem like small numbers, but the impact 0.5% can have over a period of 30 years is enormous. Therefore, with mortgage interest rates on the rise over the last few months, I think it is a great time to talk about the impact rising mortgage interest rates have when buying a home.
To start, you can think of interest as a fee that is assessed for borrowing money. It is assessed as a percentage of the amount you borrow and is added to your balance periodically. So say you borrow $100 at an interest rate of 5% a year, you will owe $105 at the end of the year for borrowing the money. That might not seem like much but when you apply that same logic to a borrowed amount of $300,000+, every percentage point is significant!
Last Fall, the interest rates dropped to an all time low and some lenders offered 30-year fixed conventional loans at an interest rate of 3.5%. Fast forward six months to today and the interest rates are right about 4.3% and rising. Some experts say that the mortgage interest rates will be grow to around 5% by the end of the year. While these are still historically low interest rates in the US, the rise of even 1% can have a large impact on your finances.
Therefore, I want to show you the impact different interest rates have on your monthly payment and overall amount you would pay over the period of the loan. In the following table, I show what the monthly mortgage payment would be on a $500,000 home that was bought with $100,000 down and a 30-year fixed conventional loan at different interest rates. So the interest rate is the only thing that is changing in each scenario.
The first thing that shocks most people is seeing that a $500,000 house can turn into a $750,000+ house in 30 years because of the mortgage interest rate that you pay. When looking at the Total Interest Paid row, you can see that the amount paid increases by roughly $42,000 for each 0.5% increase in this scenario. That's a lot of money!! Also, every 0.5% the interest rate goes up, the monthly payment increases by about $115.
So this is the kind of impact that the rising interest rates can have on your future home purchase. With that said, it is important to note that every person is in a different financial and personal situation. For example, a person who plans on only living in the home for 5 years will take a different financial approach than an older couple that is buying their retirement home.
Thus, it is super important that you work with a great lender that can give you all of the options and paint a clear picture of how each option will effect you financially. To learn more about the different types of loans and the mortgage process in general, check out our Mortgage 101 page!
*It is important to note that the monthly payments in the table above do not include real estate property taxes and home insurance that all homeowners have to pay. All interest rate calculations were done using calculators on www.bankrate.com.