Rising Mortgage Interest Rate Chart

Buying a home is undoubtedly one of the most significant investments a person can make in their lifetime. However, with the soaring real estate prices in recent years, most people are turning to mortgages to own a home. Obtaining a mortgage to finance a home is a big decision that should not be made in haste. Before going all-in, prospective homebuyers should take into account several factors that can affect their mortgage rates. In this article, we will delve into how mortgage rates affect house buying, using real-life examples supported by math and calculations.


First and foremost, it is essential to understand that mortgage rates are not entirely within an individual's control. These rates fluctuate based on several factors such as economic policies, inflation, global events, and the Federal Reserve's actions. Generally, mortgage rates tend to be higher when the economy is thriving and lower when the economy is in a recession.


The Federal Reserve, for instance, is tasked with setting Interest rates that affect mortgage rates. When the Federal Reserve increases its rates, mortgage rates tend to follow suit. The logic behind this is that financial institutions will incur a higher cost of borrowing from the Federal Reserve, leading them to adjust their rates upwards to be able to make a profit.


Consider this example: A couple seeks a $200,000 home loan at a 4% interest rate for 30 years. The mortgage payment would be $954.83 per month. At a 5% interest rate, the monthly payment would be $1073.64. With just a 1% interest rate increase, the couple would be paying an additional $118.81 per month or $42,771 extra over the life of the loan.


Often, when mortgage rates are low, prospective homebuyers quickly jump in to buy a home. Many of them fail to take into account the impacts of the mortgage rates over the life of the loan. Failing to realize the impacts of the mortgage rates on house buying can have significant financial implications, as the above example shows.


Another crucial aspect of how mortgage rates affect house buying is the borrower's credit score. The credit score provides an overview of an individual's financial health and their ability to repay a loan. Borrowers with higher credit scores are more likely to get lower mortgage rates because they are deemed less risky than those with poor credit scores.


To show how credit scores influence mortgage rates, consider a borrower seeking a $300,000 home loan. If the borrower has a credit score of 755, they can get an interest rate of 3.5%, and the monthly mortgage payment would be $1347. If the borrower's credit score is 620, they would get an interest rate of 4.5%, and the monthly payment would be $1520. Over 30 years, the higher interest rate would end up costing an additional $64,800 in total.