Interest Rates And Your Monthly Mortgage Payment

Many people are very focused on interest rates these days and are wondering where they are headed next and how it may affect their mortgage payment. Interest rates have been historically low for a very long time. And people are starting to fear that they may increase and have an outsized impact on the cost of purchasing a home.

You can see a chart of the long-term history of interest-rates by clicking here.  This chart shows that we are definitely near the bottom of where interest-rates have been over a long period of time. On the other hand, if interest-rates start to go up does it have as much of an impact as people think?

Below is a hypothetical breakdown of numbers for how a mortgage payment would be affected by various rate increases. Let’s assume that a hypothetical mortgage borrower makes an income of $100,000 a year. And assume that they are going to take out a $400,000 mortgage to buy a $500,000 home after a 20% down payment.

Let’s assume the hypothetical borrower has:

$350/month in property taxes

$80/month in homeowners’ insurance

$500/month in other debt like credit cards and school loans

The interest rate and APR figures below are strictly hypothetical and for illustration only.

Scenario @ 4.00%, 30 Year Fixed rate term¹

$400,000 @ 4.00% (4.039% estimated APR¹) = $1,909.66/month⁵

$2,839.66 is the total with taxes and insurance and other debts

$2,839.66 is 34.43% of their gross monthly income.

Scenario @ 4.50%, 30 Year Fixed rate term²

$400,000 @ 4.50% (4.54% APR²) = $2,026.74/month⁵

$2,956.74 is the total with taxes and insurance and other debts

$2,956.74 is 35.48% of their gross monthly income.

Scenario @ 5.00%, 30 Year Fixed rate term³

$400,000 @ 5.00% (5.04% APR³) = $2,147.29/month⁵

$3,077.29 is the total with taxes and insurance and other debts

$3,077.29 is 36.93% of their gross monthly income.

Scenario @ 6.00%, 30 Year Fixed rate term⁴

$400,000 @ 6.00% (6.04% APR⁴) = $2,398.20/month⁵

$3,328.20 is the total with taxes and insurance and other debts

$3,328.20 is 39.93% of their gross monthly income.

A mortgage payment going up because of a rising interest rate is never optimal. Preparing for the possibility rising rates like in the above scenarios is a good exercise. Notice that in percentage terms these increases are not as alarming as one would first think.

In the hypothetical scenario above with interest-rates spiking by 1.00%, from 4.00% to 5.00%, this causes the monthly costs of the borrower to increase by $237.63 a month which is only 2.85% of their gross monthly income.

A 2.85% increase in your carry costs, while not optimal, isn’t the end of the world. This increase should not cause someone to not buy a home. It should not make someone decide not to get the larger house they might need to accommodate their family or other circumstances.

If rates start to increase, it’s important to do the mathematical analysis carefully, look over your budget carefully, and make an informed decision of what you believe you can and cannot financially manage. 

Important Disclosures:

¹ Loan interest rate is 4.00% with a 4.039% Annual Percentage Rate (APR) on a 30 year fixed term.  Sample Conventional loan rate; A loan amount of $400,000.00 and a 80% loan to value would result in 359 monthly payments of $1,909.66 followed by 1 payment of $1,910.48. This example does not include taxes and insurance, the actual payment obligation will be higher.

² Loan interest rate is 4.50% with a 4.549% Annual Percentage Rate (APR) on a 30 year fixed term. Sample Conventional loan rate; A loan amount of $400,000.00 and a 80% loan to value would result in 359 monthly payments of $2,026.74 followed by 1 payment of $2,027.55. This example does not include taxes and insurance, the actual payment obligation will be higher.

³ Loan interest rate is 5.00% with a 5.048% Annual Percentage Rate (APR) on a 30 year fixed term. Sample Conventional loan rate; A loan amount of $400,000.00 and a 80% loan to value would result in 359 monthly payments of $2,147.29 followed by 1 payment of $2,144.22.  This example does not include taxes and insurance, the actual payment obligation will be higher.

⁴ Loan interest rate is 6.00% with a 6.049% Annual Percentage Rate (APR) on a 30 year fixed term. Sample Conventional loan rate; A loan amount of $400,000.00 and a 80% loan to value would result in 359 monthly payments of $2,398.20 followed by 1 payment of $2,400.30. This example does not include taxes and insurance, the actual payment obligation will be higher.

⁵ Taxes and insurance are not included in these examples and will result in a higher payment.