How Changing Interest Rates Can Impact Your Monthly Payments
You may have heard that changing market conditions have created a seller's market that's forcing buyers to spend a lot of money. People in many areas are experiencing housing shortages that make the seller's market strong. When you don't have enough supply to meet demand, you can expect to pay higher prices.
Changing market conditions can make it challenging to purchase real estate right now. They don't make it impossible, though. As the Fed looks to increase interest rates again, you need to work closely with a real estate agent and mortgage broker that can get you a fair deal. You won't believe how much money you save when you lower your interest rate by a small amount.
Of course, it helps to have a real estate professional searching for ways to lower your interest rate!
How Much Does Your Interest Rate Affect Home Prices?
The average home price in the United States is about $507,800. Obviously, real estate prices can differ significantly by location. For simplicity's sake, let's assume you want to buy a house that costs $500,000, and you have $100,000 for your down payment. At 20%, $100,000 should mean you don't need to pay private mortgage insurance (PMI).
You're borrowing $400,000 to purchase the home. How much will interest rates affect the full amount you pay before you own the house?
7% Interest Rate
If you get a 30-year fixed-rate mortgage with a 7% interest rate, you can expect to spend $958,035.59 plus the $100,000 you used as a down payment. This amount does not include insurance, property tax, and other expenses.
That's right. Your $500,000 house now costs nearly a million dollars. How does that happen?
Over the years, you paid a total of $558,035.59 in interest. You spent more money on interest than the actual property!
5% Interest Rate
In this scenario, everything stays the same, except you qualify for a 5% interest rate. You might not think that 2% seems like a lot. The numbers say otherwise.
With a 5% interest rate, you spend $373,023.14 on interest and a total of $773,023.14 buying the home. Lowering your interest rate by 2% saves you $185,012.45 over 30 years. Think about all of the things you can do with that much money!
3% Interest Rate
In today's real estate lending market, you will struggle to find a mortgage that only charges a 3% interest rate. It isn't impossible, but it's becoming increasingly unlikely as the Fed raises its interest rates.
Still, let's assume that you can qualify for a 3% interest rate to see how much money you would save. At 3% over 30 years, you would pay $207,109.81 in interest. The total purchase, not including your down payment, comes to $607,109.81.
Compared to a 7% mortgage, you save nearly $351,000. You save almost $166,000 compared to the 5% mortgage.
Know What You Can Control
You can control some factors easier than others when you buy a home. For example, you can probably get a lower interest rate by saving money for a larger down payment and working to improve your credit rating. In the end, your lender will choose the rate, though.
You also don't have much control over home prices. In a seller's market, you can expect to pay above the asking price.
However, you can control how much money you pay toward your mortgage each month. As long as your lender doesn't charge an early repayment penalty, you could save a lot of money by making a small additional payment each month.
By contributing an extra $100 per month toward your mortgage, you save:
- $72,851.78 on a 7% mortgage
- $41,552.74 on a 5% mortgage
- $20,087.25 on a 3% mortgage
You will also repay your loan a couple of years earlier than scheduled. It feels really good to get out of debt and own your home outright!
Let Real Estate Math Benefit Your Search
Real estate can feel incredibly confusing when you need to navigate changing marketing conditions and fluctuating interest rates. Reach out to your real estate agent today for expert advice. It never hurts to get a professional's insight into how real estate math can benefit your search!