How 4 Months Could Have Cost Us Over $20,000

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savings and mortgage interest ratesSometimes I am blown away by how fast time flies. The other thing that blows me away is how quickly things change. The combination of these two facts of life had me thinking about our recent home purchase and how much it would have changed if we had just waited four more months to make the same exact transaction.

The prices of houses in our neighborhood haven’t changed much over the last four months, so the real change that has occurred is the rise in mortgage interest rates. In the last four months, rates on a 30 year mortgage have gone up approximately 0.75%, or 3/4ths of a point. Below, I take you through a couple of scenarios of houses at different price points so you can get an idea of how much of a different mortgage interest rates matter.

$200,000 House with 20% Down Payment

Four months ago, 30 year fixed interest rate mortgages were priced at roughly 3.75%. The purchase of a $200,000 house with a 20%, or $40,000 down payment, would result in a monthly mortgage payment of $740.98. This is just the principle and interest on the loan and does not include any escrow payments such as homeowner’s insurance or property taxes.

In the last week or so, interest rates on 30 year fixed interest rate mortgages were hovering around 4.5%. They were even higher a couple weeks ago. It blows my mind how fast interest rates went up. Anyway, back on track, the monthly mortgage payment for the same exact loan today would be $810.70.

The difference of waiting four months would have resulted in a mortgage at the higher interest rate which results in a monthly payment that was $69.72 more per month, $836.64 more per year and $25,099.20 more over the full life of a 30 year loan! CRAZY!

$150,000 House with a 20% Down Payment

Many would consider a $150,000 house a much more modest house, so I thought I’d run the numbers for this situation as well. A 20% down payment on this house would run $30,000, leaving $120,000 that would have to be financed with a mortgage.

Using the same interest rates in the example above, four months ago we would have gotten a 3.75% 30 year fixed rate mortgage. The payment on this mortgage would have been $555.74 a month.

Fast forward to today and interest rates are again 4.5% on a 30 year fixed rate mortgage. This would result in a monthly payment of $608.02 a month or $52.28 more a month, $627.36 more a year or $18,820.80 more over the full course of the 30 year mortgage.

Assumption Made In These Scenarios

I did have to make a couple of assumption in these scenarios. First, there are no extra payments whatsoever made toward the principle of the loan. You just make your normal monthly payment every single month. I wouldn’t want to pay it off any faster though because interest rates, even at 4.5% are still at a historic lows.

The second assumption I made was that you’d own the house for 30 years and actually pay the mortgage off in 30 years. Most people live in and own their homes for much shorter periods of time. If you only own your home for 5-7 years, the difference won’t be as big. The problem is, if you buy another house afterwards you’ll have to get another mortgage and who knows where interest rates will be in the future!

Were you surprised at the huge difference 4 months and a 0.75% change in interest rates makes?

photo by: 401(K) 2013

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. This is true for everything in life! There are consequences for procrastinating or delaying decisions. It may be financial or other consequences. There are opportunities , we miss because we are too busy or distracted too. The larger opportunity missed is some of the lowest real estate prices in a very long time.

  2. Stephen says:

    Couldn’t have done much better, if at all. That’s got to feel good!

    I got mine right before rates bottomed, but at least after prices tanked. The house I sold I bought long enough ago that even though I probably didn’t sell it for as much as I could have, I didn’t have that much into it because I bought before the prices ballooned.

    I know what you mean about the effects of interest. My previous house was 8.375% for 30 yrs. The first year I paid about $360 in principal. lol The rest was all interest.

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