Higher Mortgage Interest Rates Will Add Hundreds of Dollars Per Month to Your Mortgage Payment

According to a CNN.com article today which cited Freddie Mac data, mortgage interest rates have reached their highest levels in 21 years. The article states that the average mortgage interest rate for the week ending August 17, 2023 in the USA now stands at 7.09%, the highest level in 21 years! But what is the practical effect of increasing mortgage rates? Let's take a look, as it may impact your decision whether to buy a house right now.

High mortgage interest rates means monthly mortgage payments can be significantly higher than what they were when rates were much less. Take, for example, someone looking to buy a $500,000 house. A $500,000 house in many urban metro areas of major cities in the United States, especially in the northeast, might not get you a lot. Most likely, you will find a smaller house that needs a lot of renovations. But, let's say your budget is $500,000 and you have cobbled together a 20% down payment of $100,000, no easy task to be sure. So, you will need a mortgage on the remaining $400,000. Assume that your mortgage rate is today's average rate, 7.09%, and that you take out a 30 year fixed rate mortgage. According to Bankrate's monthly mortgage calculator, your monthly mortgage payment would be $2,685 per month. This does not factor in property taxes, home insurance, and, if applicable, any condo or homeowner's association fees.

Now let's assume that you bought your $500,000 house last year and were able were able to secure a mortgage rate of 5%. Same down payment of $100,000. What would the monthly mortgage payment be on a 30 year fixed rate mortgage at 5%? $2,147 per month.

What if you had taken out a mortgage 3 years ago and lucked out on obtaining a 3.5% mortgage rate? A 30 year fixed rate on a $400,000 mortgage would cost $1,796 per month.

As these numbers prove, as the mortgage interest rates rise, the monthly payments rise as well, so much so that they may price out potential buyers.

Let's take a look at the effect of these interest rates on a larger property, an $800,000 house where you can only afford a 10% down payment of $80,000. So, you would need a mortgage of $720,000. Since you are putting less than 20% down, you would need to also pay PMI (private mortgage insurance). Setting aside PMI, property taxes, insurance, and home/condo fees, how does the interest rate impact your monthly mortgage payment under this scenario:

A 30 year fixed rate on a $720,000 mortgage at a 3.5% rate would result in monthly mortgage payments of $3,233.

A 30 year fixed rate on a $720,000 mortgage at a 5% rate would result in monthly mortgage payments of $3,865.

Finally, a 30 year fixed rate on a $720,000 mortgage at a 7.09% rate would result in monthly mortgage payments of $4,833.

The difference between the 5% rate and the 7.09% rate entails almost a $1,000 additional monthly mortgage payment for a 30 year fixed $720,000 mortgage. That significant jump will cause many potential buyers to wait to buy, voluntarily or because they can't afford that high of a monthly payment.

It's important to keep track of average mortgage interest rates and general financial news. If you hear that "the Fed hiked rates again," then that probably means mortgage rates will be going up. Study them and shop around to find the best rate for the home you can afford.

Disclaimer: This is not financial advice and is offered for illustrative purposes only.