Higher interest rates can mean you’re paying much, much more for a new home.
- Mortgage rates have more than doubled, from 3.11% to 6.92% since the start of the year.
- A $500,000 mortgage at 6.92% would cost $420,000 more in interest over the life of the loan compared to a mortgage at 2.65%.
- Combined with the home’s appreciation over the past two years, Graham Stephan says a 30-year mortgage was the best investment in 2021.
If you’re looking for a new home, you probably know that mortgage rates are on the rise. In fact, they have more than doubled since the start of the year and are now at their highest level in nearly 15 years.
Mortgage rates have doubled
This means that if you take out a mortgage to buy a home, you can expect to pay more interest than just a few years ago. Since the start of the year, mortgage rates have more than doubled, rising from 3.11% to 6.92%.
On a $500,000 loan with an interest rate of 3.11%, your monthly payment would be $2,137. But at 6.92%, your monthly payment would increase to $3,299, an increase of almost $1,200 per month, or $14,000 per year. Over the term of this loan, you will pay approximately $688,000 in total interest. That’s 2.5 times more than the total interest of $270,000 you would have paid on the loan at 3.11%, or about $420,000 more in total. The difference in rates in just 10 months is almost the cost of the house itself at $500,000!
For comparison, a $500,000 mortgage at 3.11% would have the same monthly payment as a $325,000 mortgage at 6.92%. Of course, this is just an example and your actual payment will depend on a number of factors, including your down payment amount, the term of your loan and your credit score.
MRAs are increasingly popular
Due to higher mortgage rates, more and more buyers are opting for an adjustable rate mortgage (ARM) rather than a conventional 30-year mortgage. An ARM has a lower introductory rate (often 0.5% to 1.5% lower than a fixed rate mortgage) for a number of years. After that, it will change according to market rates. ARMs may be suitable for homebuyers who plan to sell their home before the end of the introductory rate period or who plan to refinance in several years.
Plus, if interest rates drop in the future, you could take advantage of lower interest rates without having to refinance and pay additional fees. Your monthly payment may go down without you having to do anything. There are, however, some risks; if interest rates rise, your payments will be higher. It is therefore important to understand the risks of an MRA before deciding to get one.
Check out: We ranked this company as the best overall mortgage lender in our Best-of 2022 awards
More: Our picks for the best FHA mortgage lenders
If you’re planning on buying a home in the near future, it’s important to factor in rising interest costs when budgeting for your new monthly payment. And if you’re not sure how much you can afford, be sure to speak with a lender to get pre-approved for a mortgage before you start shopping for homes.
Our pick for the best mortgage lender of 2022
Mortgage rates are at their highest level in years and should continue to rise. It’s more important than ever to check your rates with multiple lenders to get the best possible rate while minimizing fees. Even a small difference in your rate could reduce your monthly payment by hundreds.
This is where Better Mortgage comes in.
You can get pre-approved in as little as 3 minutes, without a credit check, and lock in your rate at any time. Another plus? They do not charge origination or lender fees (which can reach 2% of the loan amount for some lenders).
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