How Interest Rates Affect Your Monthly Payment

How Interest Rates Affect Your Monthly Payment

Home loan interest rates fluctuate over time and can be affected by certain changes in the market. When interest rates go higher, options might be more limited and you can potentially have less purchasing power. However, when rates go lower, your purchasing power increases as prices are much lower. Let’s shed a bit more light on all this.

How Your Monthly Payment Is Calculated

Each month when you pay your mortgage, part of the payment will go to the principal of the loan, or the original amount you’ve borrowed, and part will go to interest. Your payment is calculated by your mortgage company using an amortization formula, which creates a monthly payment schedule.

You can repay your loan over a variable amount of years. Most mortgage loans are for 30 years, but are also available at shorter lengths. If you stretch your loan out over a longer period, your monthly payments may be lower, but you will ultimately be paying more for your home because you are paying more interest for a longer time. Conversely, if you shorten the length of time of your loan, your monthly payments will be higher, but you will ultimately pay less for your home because you are paying less interest.

Fixed Rate Versus Adjustable-Rate Mortgages

There are certain types of mortgages available, each with their own way of charging interest. The first one is a fixed rate mortgage, which has the same interest rate for the life of the loan. The payment will be the same every month for the duration of the mortgage and will never change. This is a great option if you decide on staying in your house for a very long time.

A second type of mortgage is an adjustable-rate mortgage, or ARM, and it does not lock in your interest rate. Your payments change, depending on what the current interest rate is at the time, for the life of the loan. Most loans like this do cap the amount your interest rate can go up and how often it can change, so the rate won’t go over a certain threshold.

ARMs can be tied to different financial indexes, which will change how the rates vary, so you want to verify that you’re choosing one with a stable interest rate. Also consider how often the interest rate may change. A five-to-one-year ARM will have a fixed rate for the first five years and then adjust yearly for the rest of the loan. These loans may be attractive to people who are only staying in a home for a few years.

How Rates Affect Your Purchasing Power

How Interest Rates Affect Your Monthly PaymentAccording to Shamrock Financial Corporation, every .5 percent of increase in rates could lead to a 4 to 5 percent decrease in your purchasing power.

For example, if the maximum you could spend on the principal and interest of your loan was $1,000, and you could put down 20 percent at closing, you could buy a house with a sales price of $245,000 at 4.5 percent interest but only $235,000 at 5 percent interest. These numbers are approximate, but this is just to give you an idea of just how much fluctuating rates can affect the home you can buy.

If you know rates are rising, it’s best to move more quickly when choosing a home and securing financing so that you can lock in the best possible rate.

 

Looking for real estate services in Gainesville, Haymarket or Bristow? Contact your local real estate expert Belinda Jacobson-Loehle ofJacobson Realty and Home Staging today. Also be sure to sign up now for a FREE copy of my eBook, “The Real Estate Key – What You Need to Know!”

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