What does an interest rate have to do with homeownership?
An interest rate is a percentage it costs you to borrow money to purchase your home. It’s the cost of borrowing money. The higher the number, the higher the price.
Rates have stayed historically low for the last decade, around 3%. We are sure there is a time in your childhood when the interest was 21%. A rate we could not even fathom today.
What Is an Interest Rate?
The interest rate is the amount a lender charges a borrower and is a percentage of the principal—the amount loaned. The interest rate on a loan is typically structured on an annual basis, known as the annual percentage rate (APR).
Many people are wondering if home mortgage rates will rise this year. Yes, they are expected to increase, but not dramatically. However, any rise in rates will affect your buying power. A quarter-point hike increases your payment by roughly $30 per month on a $200,000 loan or $360 a year.
How is the monthly mortgage payment affected by the interest rate?
The interest rate on a mortgage directly impacts the size of a mortgage payment: Higher interest rates mean higher mortgage payments. Higher interest rates generally reduce your buying power and lower interest rates increase your buying power. It can also help decrease the demand the real estate market is experiencing and alleviate some of the price increases on home purchases.
Keep in mind this change in interest rates will impact people purchasing homes from this point on. Anyone looking to take out a new mortgage will have to take on these new interest rates.
Combat Higher Interest Rates
One idea to help combat a higher interest rate is to take out a 15 vs. 30-year mortgage. When you consider buying a $300,000 house and have a 20% down payment, you’ll need a mortgage for $240,000. Here are what your expenses would look like on a $240,000 home loan—whether you chose a 15-year mortgage or a 30-year mortgage: For approximately $600 more a month in your payment, you’ll save $100,000 throughout a 15-year loan.
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