Mortgage rates have been on the rise over the past couple of weeks. They have been the subject of numerous articles, but authors rarely take the time to translate the increase to something we can all understand – an actual cost in dollars. Let’s fire up Excel!
We’re going to look at homes at two price points; a starter home at $250,000 and a mid-level home at $500,000. Both are very common in Greater Hartford. We’re also going to assume that we have good credit scores and can get close to the lowest rates possible. At the beginning of the year, 30 year fixed rates were about 6.25%. Recently they rose to about 6.75%.
For those interested in learning how to use Excel to calculate mortgage payments, I’ve posted the file used in these calculations. Instructions are included in the file. Note that taxes vary widely from town to town, so be sure to update that input before relying on the calculation.
Let’s begin with the $250,000 house. At the beginning of the year the mortgage portion of the monthly payment would have been about $1,231 at 6.25%. The increase in rates to 6.75% adds about $66 dollars per month, bringing the mortgage portion of the monthly payment up to about $1,297.
Keep in mind that the actual check you write each month contains homeowner’s insurance and property tax payments in addition to the mortgage amount. With a fixed rate mortgage, the portion that goes towards repaying the mortgage remains the same for the life of the loan. However, the insurance and property taxes can (and usually do) increase over time.
The mid-level house would have had a $2,463 mortgage payment on a 30 year mortgage at a fixed 6.25%. Recent rate changes have bumped that payment to $2,594, and increase of about $132 per month.
The difference in monthly payments seems small compared to the overall total, but let’s try to put it in perspective. An increase of $66 per month for the entry-level house is about the same as a typical electric bill (without air conditioning). The $132 difference for the mid-level house is comparable to cable TV, internet and phone.
Although it seems like a bit of an exaggeration to say that the recent increases in interest rates have a major impact on the affordability of housing, homebuyers will feel the impact. Despite the increase, buyers shouldn’t delay their purchase in hopes that rates will decrease – the financial markets are expecting more increases.