Your mortgage is typically the total of four components: Principal, interest, insurance, and taxes.
With a fixed loan, the total dollar amount of principal plus interest stays the same throughout the life of the loan. However, you pay more interest on the front end of the loan and more principal on the back end. The homeowner’s insurance and property tax components will vary based on the market rates in your area.
Since principal and interest usually make up the bulk of the total payment, let’s focus on those to see how an additional one percent rate hike might affect your monthly mortgage payment. If you take out a $400,000 loan at an interest rate of four percent, your principal and interest payment per month would be $1,910.
The same $400,000 loan at five percent interest would equal a monthly payment of $2,147 per month. That’s a difference of $237 per month or $85,230 over the life of the loan. While a one percent rate increase seems insignificant on the surface, it can have drastic effects on home buyers who haven’t locked in.
That same one percent increase in rate is equal to an eleven percent decrease in buying power. From the beginning of 2022 through today, buyers have lost twenty-five to thirty percent of their buying power from interest rate hikes. That’s enough to shock anyone into taking a pause and readjusting their strategy.
So, what are your options? Unless we have a worldwide cataclysmic event like the financial market meltdown, prices are not going down in the near future. Home prices are currently at the least expensive point they will be over the next five years.
It is better to adjust your expectations and buy what you can afford now than it will be to continue to wait. Appreciation will put you in a stronger position when it comes time to buy the dream home a few years down the road.
Adjustable-rate mortgages have become popular again, however, you need to proceed with caution. The rate is fixed for a certain time period, after that, it adjusts to market rates which could be higher than today. If there is not a huge savings in rate, I would stick with a more reliable, fixed-rate loan.
You could also choose a fifteen-year mortgage instead of a thirty-year. Not only will you pay a lower rate, but you’ll save thousands in interest. Making one additional payment towards principal each year will help you shave 5-7 years off the life of a thirty-year loan.
Whatever you decide, keep an eye on interest rates. They change daily and the market moves fast. If you’ve purchased a house when rates fall about one percent below what you are currently paying have your lender give you an estimate to refinance. Refinancing makes the most sense when you can recap your costs in just a few years.
Steve Jolly is President of Greater Nashville Realtors. A Realtor is a member of the National Association of Realtors who subscribes to its strict code of ethics. You can reach Steve at 615-519-0983 or Steve@NashvilleRealEstateNow.com
