It’s no secret that interest rate matters to the total affordability of your loan. Borrowers, lenders, real estate agents, lending professionals; everyone in the mortgage and real estate industry is aware that interest rates matters. But just how much does it matter? What’s the actual cost of a high interest rate on your mortgage loan? Is it a small issue, bordering on insignificance? Is it the single most important factor for your loan?
While there are times when a low interest rate is not always best, in a fair, consistent comparison, a low interest rates will enhance the affordability of your loan.
Here’s a few examples of just how much a low interest rate can make a difference…
What’s the Cost of High Interest?
There are countless variable that can be changed, twisted, and manipulated, making mortgages extremely complex and, in many cases, downright confusing. To help you understand the cost of high interest on your loan, we’ll try to keep things as simple as possible. For this example, we’ll use a 30-year loan and eliminate all other factors, such as downpayment, taxes, and insurance from our calculation.
We’ll focus solely on the “P&I” portion of your monthly housing costs so we can dial in on the impact of interest rates on a mortgage payment.
To make our calculations, we’ll use the basic Mortgage Calculator found on our website. While this tool can only provide a rough estimate on pricing, and should not be considered an official offer for pricing or interest of any sort, it can help you better understand the cost of high interest on your loan, as well as the impact of factors such as downpayments, property taxes, insurance, and other additions to the loan.
We’ll also look not only at the monthly payments, but the total cost of interest over the full term of the loan, which in this cases is 30 years. Over a 30 year period (assuming you keep the mortgage that long; not everyone does), there will be 360 total payments, so we will simply multiply the monthly payment times 360 to reach our “total costs” estimate.
Without further ado, let’s see how changing the interest rate will make a difference on various loan prices…
$250,000 Loan
|
Monthly P & I Payment |
Total Cost |
|
|
2.5% |
$988 |
$360,680 |
|
3.0% |
$1,054 |
$379,440 |
|
3.5% |
$1,123 |
$404,280 |
|
4.0% |
$1,194 |
$429,840 |
|
4.5% |
$1,267 |
$456,120 |
|
5.0% |
$1,342 |
$483,120 |
Even on a relatively small loan like this, we see a significant impact when adjusting the mortgage interest rate. With just half of a percentage, the mortgage interest rate trends upward; the difference between 2.5% and 3.0% is $66 a month, the difference between 4.5% and 5.0% is, according to our calculations, $75 a month.
This may seem insignificant until you consider the total cost over the life of the loan. From 3.0% to 3.5%, for example, we have a total increase of $24,840. When we jump from 2.5% all the way to 5% (a massive and unlikely increase, we admit) we see a difference in total cost of $122,440.
$500,000 Loan
|
Monthly P & I Payment |
Total Cost |
|
|
2.5% |
$1,976 |
$711,360 |
|
3.0% |
$2,108 |
$758,880 |
|
3.5% |
$2,245 |
$808,200 |
|
4.0% |
$2,387 |
$859,320 |
|
4.5% |
$2,533 |
$911,880 |
|
5.0% |
$2,684 |
$966,240 |
As we increase the total loan, we see that the interest rate has a larger impact on the monthly and total costs for the mortgage. Simply going from 3.5% to 4.0%, as an example, adds $142 to the monthly mortgage and adds over $50,000 to the total cost over the life of the loan. When we go from 2.5% all the way up to 5%, the monthly payment increases by $709 while the total cost is increased by over $250,000!
$900,000
|
Monthly P & I Payment |
Total Cost |
|
|
2.5% |
$3,556 |
$1,280,160 |
|
3.0% |
$3,794 |
$1,365,840 |
|
3.5% |
$4,041 |
$1,454,760 |
|
4.0% |
$4,297 |
$1,546,920 |
|
4.5% |
$4,560 |
$1,641,600 |
|
5.0% |
$4,831 |
$1,739,160 |
Increasing the loan to $900,000 makes the interest rate all the more significant. A change in just half a percentage can mean massive changes to the monthly costs and total affordability of your loan. If the mortgage changes from 3% to 4%, for example, the adjustment in monthly cost is roughly $300. For every half a percentage point, we see an increase in total cost by about $80,000 to $100,000, with the difference increasing the higher you go in interest.
From 2.5% to 5%, a massive difference, we see the total cost increase by $459,000!
Home Prices Escalating, Making Interest All the More Important
As you can see, interest rates impact different loans in different ways. One constant, however, is the simple principle that if the loan is larger, the total impact of high interest will be greater. With housing prices on the rise across the country, getting a low interest rate may be more important than ever.
Right here in our market of San Diego, we have seen large increases in total home prices, with few signs that the market will flatten in the near future. San Diego is, of course, an extremely attractive market, but there has also been a shortage of inventory and increased demand for spacious housing, which is leading the massive competition and, as a result, rising home prices.
This is not just an issue in San Diego. Markets across the country, from major metro areas to mid-sized cities to small towns, from the New England market to the Midwest to the Rockies to the Southeast; every area is experiencing rises in home prices.
Because prices are high, it’s essential that you get a loan with the lowest possible interest rate.
Get an Affordable Loan with Out Expert Team
Rising home prices in virtually every market across the country mean you need to get the best possible interest rate. With deep knowledge and years of experience in the real estate industry, as well as access to numerous resources, we can help you find the right loan to fit your specific needs.
Contact our team today and let us help with your next home mortgage!
