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A higher mortgage interest rate could cost you a lot of extra money over time. Here’s how much interest you might pay if you borrow at a high rate.
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If you are buying a house right now, you should be aware that mortgage interest rates are pretty high. Although they hit record lows during the pandemic, they have been steadily climbing ever since and recently hit a 23-year high.
The big question you may have is, just how big of an impact will this have on your finances? How much does a higher mortgage rate actually cost you in the end? Here’s the answer to this question, so you can make an informed choice about whether to move forward with your home purchase now during this time of high rates.
The cost of a higher rate
To understand just how much a higher mortgage rate will cost you, take a look at the table below. It shows the monthly payments and the interest that you would pay for each $100,000 of mortgage debt if you took out a 30-year loan at different rates.
As you can see, a higher rate costs you a lot of extra money. Your monthly payment could be hundreds of dollars per month more if you get stuck borrowing at 8.00% instead of 3.25%. And for each $100,000 you borrow, you could pay over $100,000 in extra interest costs over the life of the loan. That’s a huge amount of money that you cannot do other things with, like investing it for your future.
Should you get a mortgage at a high rate or wait?
The reality is, mortgage rates at 3.25% are long gone and no one can predict if or when rates might drop to that level. In fact, rates could just as easily keep going up for the next few years rather than coming down.
If you decide you’d rather wait until rates fall, you could find yourself waiting a long time to get a mortgage loan — potentially years. During that time, you could miss out on property appreciation, meaning homes could be more expensive when you go to buy. You’ll also be missing the chance to start paying down your mortgage and building home equity, and will just be paying rent for many extra years instead.
If, on the other hand, you purchase a home now when rates are high, you would have the chance to refinance later if they do fall. In other words, you aren’t locked into your high-rate loan forever. You could borrow at today’s rates, and if rates decline, you can refinance later — but if rates go up, you’ll be locked in at today’s costs and won’t have to pay even more in the future.
You do need to make sure you can actually afford the costs of your home loan. You should keep your costs below about 25% of your income — even if that means buying a smaller, cheaper house. But if you can do that and you are otherwise in a good financial position to get approved by a mortgage lender to buy a home (which means you have decent credit, a down payment, and some savings), then high rates shouldn’t necessarily be a dealbreaker despite the added costs they come with.
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