Mortgage Rates Are Rising – How Much Does It Matter?

Interest rates on long-term mortgage loans have jumped dramatically in the past couple months, as the Federal Reserve has hinted that it will ease up on its rate-dampening actions sooner than later. The average rate on a 30-year fixed rate mortgage rose to 3.98 percent last week, according to mortgage giant Freddie Mac, up from a recent low of 3.35 percent during the week of May 2, just seven weeks before.

The jump in rates has pushed many reluctant buyers and refinancers to get into the market to cash in on low rates before its too late. But is a half percentage point increase really a cause for mortgage mania?  How much of a difference will a rise in rates make to your loan? The answer is both “not much” and “quite a bit.”

Not Much

Interest rates are still extremely close to all-time, historical lows even though they may continue to rise over the next year. A Bloomberg article  gave the following example:

For every $100,000 in home price, today’s higher rate adds about $40 or so a month to the cost of a 30-year fixed-rate mortgage, compared to when a 30-year fixed-rate was at 3.5 percent. So if you’re looking at a $250,000 home with a 20 percent down payment you’re talking about an $80 increase in your monthly mortgage payment.

That’s not an amount that’s going to make or break the deal for most buyers.

Quite a Bit

On the other hand, over the course of a 30-year loan, the difference of one percent can cost you a lot in total interest payments. For example, a $200,000 30-year fixed rate loan at 5 percent will cost you about $42,000 more over the life of the loan than would a 4 percent rate. That’s a lot of money that could be invested elsewhere.

And of course, higher interest rates make all the difference in refinancing. Refinance requests have made up a large majority of all mortgage applications for the past several years, but that is likely to change as rates climb higher and the cost-savings are not as great.

So, if you can afford to spend a little more over 30 years, gradually climbing interest rates will not have a big impact on you, but the opposite is true if you are trying to stick to a budget or refinance for greatest savings.

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