If you’re a hopeful homebuyer, there’s something important you need to know: your estimated monthly payment might be way off.This is one of the most common—and costly&mdash
Do Interest Rates Really Matter?
Dated: December 24 2021
Views: 7
The last year has been a whirlwind of rapidly increasing home values and competitive offers, but one of the few saving graces has been the low interest rates. Is a low interest rate really worth getting involved in the current craziness? Today, we’re going to do the math so that you can see for yourself just how big of a difference an interest rate makes when calculating your monthly payment and overall payoff to eliminate your mortgage altogether.
To simulate the importance of interest rates, we are going to run a few different scenarios, all using estimated numbers and approximate math. In each of these scenarios, Sarah and Max are going to be buying a house for the first time. The house they like is $300,000, and they are trying to decide how much to put down and what interest rate to go for so that they end up in a great position for this investment. In all of these situations, the following parameters remain the same, and these two calculators were used: True cost of a loan and Google’s built in mortgage loan clculator:
- Credit score of 745
- Property taxes of $3750
- Home insurance of $1,050
- No HOA
- Conventional loan with no PMI
Option 1: 20% down with a 3% interest rate for 30 years
Down payment: $60,000
Estimated Closing costs: 8K
Monthly Payment with estimated taxes and fees: $1,412
Lifetime payoff of loan: $364,265.89
Option 2: 20% down with a 2.5% interest rate for 15 years
Down payment: $60,000
Estimated closing costs: 8K
Monthly payment with estimated taxes and fees: $2,001
Lifetime payoff of the loan: $288,052.94
Option 3: 20% down with a 3.5% interest rate for 30 years and wrapped in closing costs
Down payment: $60,000
Estimated closing costs paid at closing: $0
Monthly payment with estimated taxes and fees: 1513.63
Lifetime payoff of the loan: $400,907.10
Option 4: Wait a year and hope that house prices decrease so that they can get the same house for 275K (this is not projected, by the way). Then 20% down with a 4.75% interest rate and a 30 year loan.
Down payment: $55,000
Estimated closing costs: 8K
Monthly payment with estimated taxes and fees: $1,549
Lifetime payoff of the loan: $413,144.59
Option 5: Wait a year and hope that house prices decrease so that they can get the same house for 275K (this is not projected, by the way). Then 20% down with a 4% interest rate and a 15 year loan.
Down payment: $55,000
Estimated closing costs: 8K
Monthly payment with estimated taxes and fees: $2,028
Lifetime payoff of the loan: $292,916
Looking at these numbers, a couple of things become very apparent. 1) A 15 year is going to cost you more per month but is going to save you a ton throughout the lifetime of the loan if you are able to qualify. 2) Even a 25K drop in price won’t make up for a 1.25% interest rate increase. By waiting for the market to drop (which again, is not expected according to economic reports and market analysis), they ended up paying 100 more per month even though they got the house for 25K because interest rates went back up to a more typical range. It’s important to understand that with our current market, we have lived through the lowest interest rates on mortgages our market has ever seen, and that is not projected to be the norm forever! Additionally, while the numbers used in this comparison were simple estimates, they are purely intended to demonstrate different scenarios which could occur and are not representative of how your exact scenario will play out. There are just too many variables to estimate exact amounts until you have personally gone through the preapproval process!
Trying to figure out your smartest next steps? Send us a message using the messenger icon on this page, or give us a call at (678) 242-9981, and we’ll do our best to help answer your questions or get you connected with a lender we recommend and trust to take care of you!
Kate Valor
Kate founded Homes By Valor with the idea that every person deserves to find a house that feels like home. She believes strongly in searching until you find the exact right place to call home, and she....
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