Mortgage rates have been all the rage this year, with new record lows met with equally unprecedented upsurges.
It’s been a rough ride for many of those in the business, along with homeowners looking to refinance or purchase a new property.
But there are two ways of looking at today’s higher rates, and it’s not all bad.
The Monthly Payment Perspective
Most banks and lenders focus on monthly payments. It’s pretty rare to see a lender advertising how much you’ll pay in interest over the term of your loan.
Heck, if banks did flaunt you how much interest you’d be paying them over 30 years, you’d probably walk away from the deal.
But seriously, payment is always king, and for good reason. When you get qualified for a loan, underwriters consider your monthly payment, not how much interest you’ll pay for the next several decades.
They use the interest rate you’ve pre-qualified for to determine your DTI ratio, which has certain limits you must adhere to if you want to get approved.
And so let’s look at mortgage payment for a moment. On the popular 30-year fixed, rates have risen from around 3.5% in May to roughly 4.625% today, depending on your loan scenario.
Obviously, the more risk you present to the bank, the higher your interest rate, and vice versa, but we’ll use those best-case rates for comparison sake.
Last week, the FHFA said the average loan amount for all conforming loans was $278,200 in July, down from $282,400 in June. So again, let’s use $275,000 as a base loan amount.
Plugging in those numbers, the monthly mortgage payment was as low as $1,234.87 in May, and is now closer to $1413.88. That’s a difference of $179.01.
While nearly $200 is nothing to sneeze at, for many homeowners it shouldn’t be a deal breaker in and of itself.
Yes, it means some people won’t qualify any longer if they were on the cusp, but I doubt it’d be a big enough deal for many would-be home buyers to walk away entirely.
The stories in the media about people walking away over a few hundred dollars are probably a bit sensationalistic and few and far between.
Anyway, the monthly payment difference isn’t all that bad, that’s the point.
The Total Interest Due Perspective
As I said above, banks don’t advertise how much interest you’ll pay over the life of the loan. They focus on payment.
And they’ll probably use the same argument I just made to make home buying attractive, even with a substantial interest rate increase.
But using the same numbers we relied upon in the prior example, the average homeowner would pay an extra $64,443.60 in interest today as opposed to back in May.
If banks presented things in terms of interest paid over the life of the loan, many more homeowners would probably be discouraged to buy a home now that rates have ticked higher.
Long story short, $180 extra a month doesn’t sound too bad. Just skip your Starbucks here and there and eat out less often. Maybe drop Showtime.
Conversely, paying an additional $65,000 or so because you couldn’t find a home a few months ago is a pretty big sticker shock, and could make buyers think twice.
Of course, it all depends on how long you plan to keep your loan. Most homeowners don’t actually stay in the same loan or home for more than 10 years, so perhaps payment should be the chief concern.
It even makes the argument for an ARM a lot more attractive, and those are still being offered in the low-3% range.