20 Second Advisor: 6% vs 2.5% Mortgage – The impact of rising rates on home affordability
If you’re looking for a prediction on when interest rates will rise or fall, alas, I cannot give you that info as I left my crystal ball at home this morning. But, I want to point out how much the recent rise in interest rates affect the monthly payments homeowners must pay when refinancing or buying a new home.
A year ago, it was feasible to get a 30 year mortgage for 2.5% (I myself refinanced to 2.75% last year). Today, mortgage rates are closer to 6%. How much is the extra 3.5% costing new homeowners? Let’s see:
Assuming a 750k mortgage:
30 yr. mortgage @ 2.5% = $2963/mo. payment
30 yr mortgage @ 6% = $4,497/mo. payment
The difference is $4497 / $2963 = 1.5177 or 51.7%
So, a homeowner buying a house with a 750k mortgage today is paying approximately 50% more on a monthly basis than they were 1 year ago.
Some homeowners and investors are tempted to believe that rates will sharply decrease again in the months ahead. They may be correct, but only time will tell. However, the last time we had persistently high inflation, it took a LONG time for rates to come back down. See below for historical mortgage rates:
This chart shows that in the early 70s mortgage rates rose above 7% to combat inflation. It look over 20 years for rates to come back down below 7% again.
The moral of the story: When making a financing/buying decision, make sure you can afford the payment for the long haul. While it may be nice to think about if rates decline again in the coming months, it could be years and years before we see a decline in rates.
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