Buying a home is one of the biggest financial commitments that you can make. As we say all the time, there are very few other things you will ever buy that cost more than a hundred thousand dollars! With all of the moving pieces, the home-buying process is very complex and can be difficult to understand. One of the pieces that buyers often struggle to understand is the interest rate.

 

To some, interest rates might seem easy to comprehend. To others, they may seem more foreign. In either case, many prospective buyers fail to understand just how small of an impact the interest rate has on a mortgage loan. This post will explain why.

 

How Does the Interest Rate Impact Home Prices?

When you take out a mortgage, a large portion of what you pay each month is interest. This is how mortgage lenders make money! When they agree to loan you hundreds of thousands of dollars, they are naturally assuming a large amount of risk. Interest is what makes that risk worthwhile for them.

Mortgage interest rates are determined by a lot of factors, but they tend to move similarly to the federal funds rate set by the Federal Reserve. When the Federal Reserve raises its rates, interest rates tend to rise as well. For this reason, the average mortgage rate fluctuates greatly throughout the year.

Depending on the loan type, the interest rate applies for the full life of the loan. This means that for most 30-year mortgages, you lock yourself into the current rate and will continue to pay that rate in your monthly mortgage payments through the very last year of the loan term. This is what deters many prospective buyers from pulling the trigger on a home when the average interest rate is a bit higher.

 

 

The Mortgage Interest Rate Is Less Significant than Most People Think

Before you sign a mortgage contract, your lender will provide you with a full cost sheet detailing the components of your monthly payment. The monthly payment will consist of principal, interest, property taxes, and homeowners insurance. The interest follows an amortization schedule, which means that the first few years of the loan include significantly more interest than principal, and eventually that flips.

If you use a mortgage monthly payment calculator and adjust the interest rates, you may see that the interest rate actually causes very little difference in the monthly payment. In some instances, a full percentage point difference in the interest rate may only amount to $100-200 per month. While $100 extra per month to your mortgage payment is $100 less per month to your savings, it really isn't that much money on a monthly basis. Over the life of the loan, it could mean thousands of dollars of difference, but that only matters if you plan on living in the home for the long term!

If you plan on buying a home to live in for 5-10 years, the interest rate is a lot less important than if you plan to live in the home for the full duration of the mortgage. Many buyers zero in on the interest rate, when in reality they should just concern themselves with their monthly budget.

 

How High Are Mortgage Interest Rates Right Now?

When you compare today to 2020, you will encounter much higher interest rates. However, when you compare today to the 1980s and 1990s, you'll actually see historically low rates. The recent average rate is around 6.5%, although it does ebb and flow upward and downward. This figure is often compared to the much lower rates that occurred during the COVID-19 pandemic, when it wasn't uncommon to see an annual percentage rate of 3%.

While today's rates may be nearly double what they were a few years ago, that doesn't mean that they are bad. If you can get a 30-year fixed-rate mortgage today at 6.5%, you are in a much better position than the vast majority of home buyers over the past 5 decades. The housing market has been through a lot in the past year, but that doesn't mean that it is a bad time to buy. Waiting for a lower interest rate may be a good idea for some, but passing up on great listings just in the hopes of the rate declining isn't wise. Realistically, the interest rate isn't likely to drop more than a point in the course of a year anyway, so your full year of waiting is likely to amount to $100-200 per month in savings.

 

How Do Today's Mortgage Interest Rates Compare to Past Years?

To better understand just how normal today's interest rates are, you can take a look at the average interest rates by decade since the 1970s. We used a mortgage calculator to calculated the monthly mortgage payment that would have been due on a $500,000 home in each of the past 5 decades, plus what it would look like today. For the calculation, we assumed a down payment of 20% and did not consider closing costs. Notably, today's rate is cheaper than 3 of the 5 past decades, and only slightly higher than another one.

In the 1970's, the interest rate ranged from 7.29% to 19.9%. The monthly payment on a $500,000 house at 9.077% (which falls in the middle of this range) would be $3,241. In the 1980's, the rates ranged from 9.2% to 18.45%. The monthly payment on the same home at 12.702% would have been $4,334.

In the 1990's, the rates dropped significantly. They ranged from 6.79% to 9.64%, and the monthly payment on an 8.118% loan would have been $2,988. In the 2000's, the rates continued to drop, ranging from 4.81% to 8.52%. The monthly payment at 6.292% interest would have been $2,473.

Finally, in the 2010s, the rates really bottomed out. This is part of what makes today's rates feel so bad. The rates ranged from 3.45% to 4.99%, and the monthly payment at 4.09% would have been $1,930. Today's average rate is about 6.5%, which would be a $2,528 monthly payment.

 

All in all, this goes to show that today's mortgage rates are still historically low, and this is not a disproportionately bad time to buy a home. 

 

Thanks for reading our post about the state of today's mortgage rates in the United States. While market conditions are a bit unusual right now, it is not a bad time to buy a new home. Rate hikes are expected to stop in the coming months. While lower mortgage rates might be around the corner, they are likely still too far off to be worth waiting for. In many cases, it is worth paying a higher rate to close on a home now rather than sitting around waiting for the rates to drop. Additionally, different lenders offer different rates, and working with multiple lenders to take out a home loan can ultimately lead to much lower monthly payments, regardless of the current interest rate.

 

If you visit Myrtle Beach or any other place in South Carolina and fall in love, we’re here to help. We at The Boyd Team are committed to helping you find the right property for your needs and dreams. Any question that you have about moving to the area and finding your dream home by the beach is our pleasure to answer. Feel free to send us an email at eddie@boydteam.com or text or call us at (843) 222-8566, and we will get back to you as soon as we can. Being true natives of the Grand Strand and Horry County and with over 25 years of experience in the local real estate market, whether buying or selling, we can help you make your dreams a reality.  

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