Interest rates affect your monthly payment, and the amount you will have paid by the time your loan is paid off.
Minute increases in interest rates directly affect the amount a buyer ends up paying in the short and long-term.
Let’s run some numbers to better illustrate.
We have found your dream property, at your price point of $500,000.
The interest rate on your $500,000 dream home is 3.875%. For a 30 year, conventional mortgage you can expect your monthly principal and interest (P&I) payment to be $2351 By the time the loan has been paid off, you will have paid $1,595,967.
But, you just aren’t certain. Prices have been going down, and you want to wait a week or two, see if the sellers reduce their price. What does waiting a week or two hurt, right?
Unfortunately, when you next look at this purchase, interest rates have gone up. Now, the best rate you can get is 4.25%, and increase of .375%.
Your same property, now at 4.25%, is costing you $2460 per month. Principal and interest payment has increased by $109.
Along with that the total amount paid on the loan which previously was $1,595,967 has now increased to $1,785,325, a difference of $189,357 over the life of the loan. Wow.
The chart below illustrates how changes in rates will continue to affect you, at different percentages.
Value Int Rate Term P&I Payment Total Paid Difference
500K 3.875% 30 year $2351.19 $1,595,967 From 3.875%
500K 4.00% 30 year $2387.08 $1,656,749 $72.62/60,781
500K 4.25% 30 year $2459.70 $1,785,325 $108.51/189,357
500K 4.50% 30 year $2533.43 $1,923,849 $182.24/327,882
The question you should be asking yourself is, do you forecast the market dropping far enough to cancel out an increase in interest rates? Or are you ok paying an additional $70-$180, or more a month, to continue waiting on your purchase?
Interest rates are at historic lows right now make sure you take advantage of them!