March 19, 2018

How Will Rising Rates Affect Your Bottom Line

With the heightened talk about rising interest rates, many prospective homebuyers are understandably concerned about whether the upcoming Spring Homebuying Season is the right time to purchase a home. Did they wait too long and let the historically–low interest rates pass them by? Or can they still find a dream home that fits within their current budget?

It's true that rates are at their highest in almost four years. This year has been particularly rough, with the U.S. weekly average 30–year fixed–rate mortgage (FRM) rising .49% since the start of 2018. But it's not all bad news. Rates are still well below the levels we saw 10 years ago (30–year FRM was 6.13% on March 13, 2008), 20 years ago (7.16% on March 13, 1998), or 30 years ago (10.98% on March 17, 1988). And as we discussed in a recent blog post, between 1977 and 1981, rates increased from 8% to 18%.

In short, now is still a great time to buy, but your wallet might take a hit if rates continue to go up. How big will the hit be? Let's crunch the numbers.

First, let's assume you buy a house with a 20% down payment and take out a $200,000 mortgage. Second, you are getting a 30–year fixed–rate mortgage. The only thing we are changing in this scenario is the interest rate:

Interest Rate Monthly Payment Total Interest Paid
3.0% $675 $82,844
3.5% $718 $98,650
4.0% $764 $114,991
4.5% $811 $131,851
5.0% $859 $149,209
5.5% $908 $167,046
6.0% $959 $185,341
6.5% $1,011 $204,071
7.0% $1,064 $223,214
7.5% $1,119 $242,748
8.0% $1,174 $262,648
8.5% $1,287 $282,894
9.0% $1,642 $303,463
9.5% $1,345 $324,332
10.0% $1,404 $345,481
18.0% $2,411 $708,081
Note: Mortgage payments are principal and interest only, based on a $200,000 fully amortizing mortgage. All terms are assumed to be 30 years.

As you can see from the table above, if rates move from 4.5% to 5%, you can expect to pay around $50 more per month. Not ideal, but likely not a deal–breaker for most prospective homebuyers. But if rates jump to the levels they were in 1981 (average of 18%), you can expect to pay a whopping $1,600 more per month, which may cause many homebuyers to think twice about taking the plunge into homeownership.

Want to find out how much you'll pay? Check out our Fixed–Rate Mortgage Calculator.