Inflation, Interest Rates and Monthly Mortgage Payments
National average 30-year fixed rate mortgage interest rates have been at or near record lows for a decade. They should stay low forever, right?
Economists predict that rapid inflation is among the reasons the Federal Reserve will start raising overnight borrowing rates to banks, which will, in turn, raise interest rates to consumers and businesses when they borrow money.
Inflation is measured as the annual rise in the cost of living. When inflation rises more than 2%, there are numerous consequences. Goods cost more, causing workers to seek higher wages. This can cause uncertainty for businesses that may slow their investments down as a means of demonstrating caution. Interest rates go up to increase borrowing costs in order to slow down consumer consumption. Mortgage interest rates will increase, and things can change quickly for homebuyers and sellers.
Consumer behavior during inflationary periods is unpredictable. Some consumers decide to pull back and not make new purchases, while others leap in to make purchases before prices go up any further. This is one of the reasons why the demand for housing is driving up home prices. Interest rates have been unnaturally low for over a decade, so the anticipation of rising interest rates has some homebuyers scurrying to get in a home before home prices go any higher.
Eventually, homebuyers reach their pain threshold and the market for homes can slow down suddenly and dramatically. Once demand ebbs, prices begin to come down. Borrowing rates won’t come down as long as inflation is higher than 2% to 3%, but eventually, low market activity will cause borrowing rates to fall. Lower housing prices coupled with lower interest rates are irresistible and homebuyers will flock back to the market.
The ebb and flow in demand and affordability are constantly changing. To illustrate changing mortgage interest rates and their impact on your monthly
payment, consider what a difference even a small rise in interest rates means to you.
If you take out a mortgage for $400,000 with a benchmark fixed-rate 30-year mortgage with a commitment rate of 3%, your principal and interest payment would be $1,686.42. Assuming you make all 360 total payments, you’ll pay $207,109.81 in interest over the term of the loan. That’s $400,000 you’ve paid back plus 207,109.81 in interest for a total of $607,109.81.
If interest rates go up, say to 3.25%, your payment will be $1,740.83 and the total interest you’ll pay will be $226,697.10. With just a quarter point rise in interest rates, that’s a difference of $54.41 more per month and an additional $19,587.29 in interest.
What if interest rates go up as economists predict? If you’re interested in buying a home, mortgage rates are unlikely to stay low much longer, but you have to weigh that against current home prices and whether or not you want to take the risk that they’ll rise further or whether it’s better to wait and see what happens.
It’s said in real estate that it’s always a good time to buy a home. Even if the value of your home goes down because of market fluctuations, eventually it will recover and hopefully deliver a profit to you when you sell.