Mortgage Rates Hit Almost 7.5% — What Waiting To Buy Could Cost If They Keep Rising
With mortgage rates hitting almost 7.5%, the sub-3% rates seen during the pandemic (per Freddie Mac) must feel like a dream to potential homebuyers. For someone taking out a $400,000 mortgage, a one-percent increase from a 7% rate to an 8% one adds roughly $266 to the monthly payment, with all of it being attributable to interest.
Freddie Mac's Primary Mortgage Market Survey shows that the average rate on a 30-year fixed mortgage reached 7.40% as of Oct. 8, up from 6.67% just a month earlier, per Yahoo Finance. The Mortgage Bankers Association reported an even higher 7.49% average in its Oct. 7 weekly mortgage survey.
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The million-dollar question is whether or not rates are going to continue going higher or if they are reaching a peak. For buyers considering waiting, find out how much a rate higher than the current 7.40% could change the math.
The Mathematics of Higher Rates
At Freddie Mac's current 7.40% average rate, a buyer taking out a $400,000, 30-year fixed-rate mortgage would pay about $2,770 every month in principal and interest.
If rates rose to 7.5%, that payment would increase to approximately $2,797. At 8%, it would reach about $2,935.
That means if you wait for rates to fall and instead they jump to 7.5%, you’ll end up paying about $128 more per month. At 8%, the difference would be about $266 per month.
This effect increases with the size of the mortgage.
The Effect Is More Dramatic Over 30 Years
For that same $400,000, 30-year mortgage at 7.40%, a borrower would pay about $597,027 in interest over the life of the loan. With a 7.5% rate, the total interest would jump to $606,869. That’s about $46,000 in extra interest that wouldn’t help reduce your principal balance by a single penny.
At 8%, the effect is even more dramatic. Total interest paid would rise to over $656,000, an increase of nearly $96,000.
It’s true that if rates fall in the future, homeowners on the hook for higher-rate mortgages could refinance and reduce their eventual cost. There are no guarantees that lower rates will become available any time soon, however.
Compare the Cost of Waiting With What You Could Gain
Rising rates can drive up the cost of a monthly mortgage payment, but so too can increasing home prices. That’s an additional risk facing potential homebuyers who choose to wait.
The median existing-home price was $429,100 in August, up 1.6% from a year earlier, according to the National Association of Realtors. Even if rates fall, it might not offer buyers much relief in terms of their monthly outlay if home prices continue rising.
On the flip side, inventory also increased to 1.62 million homes. This is a plus for buyers because it gives them more properties to choose from and can potentially offer more leverage in negotiations.
For some buyers, waiting can offer additional benefits.
Those struggling to save up for a down payment might benefit from a few additional months or years of savings. A larger down payment can also result in a lower rate and may eliminate private mortgage insurance in some situations, according to the Consumer Financial Protection Bureau's (CFPB) down-payment guidance.
Waiting can also give those with poor credit scores the time needed to improve them. The CFPB noted that borrowers with stronger credit generally qualify for lower mortgage rates.
No one can tell for certain where interest rates will head next. Rather than trying to predict the unknowable, buyers can run some calculations to determine how their payment would change at several possible rates and compare that additional cost with what they might gain by waiting. Knowing these numbers ahead of time can make it easier to decide whether to buy now or wait.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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