How Much Will Rising Mortgage Rates Cost You?

Mortgage rates are rising. An average 30-year fixed mortgage carried a 3.35% interest rate nine months ago. Today, the same loan will cost you 4.46%. That's a big jump.

But we know most Americans aren't very good at finance. And they're pretty bad at math, too. The media has been buzzing about rising mortgage rates for the last two weeks, but I'm willing to bet most people can't contextualize what it means for them. The majority of Americans don't know how many millions are in a trillion. Trust me, they have no idea what a 110 basis point rise in mortgage rates might do to their monthly bills.

So, here's a way to put it in perspective.

I took average mortgage interest rates going back to 1980 to see how much monthly payments would be on a 30-year fixed-rate $250,000 loan. Have a look:

Source: Federal Reserve, author's calculations.

If you take out a $250,000 mortgage with a 30-year, fixed-rate loan today, your monthly mortgage payment will be $1,261, up from $1,145 a year ago, and down from $2,200 in 1990 and $3,489 in 1980. (Keep in mind: if you have a fixed-rate mortgage, rising rates won't affect your monthly payment. Rising rates increase monthly payments for those taking out new loans or refinancing existing mortgages.)

We're probably not going back to 1981 interest rates anytime soon. But just going back to 2008 interest rates would add $244 a month to the monthly bills of someone looking to finance $250,000 worth of home. Returning to 1994 interest rates would add $600 to our borrower's monthly bills. 

How can they afford that? Right now, they probably can't. Households have room in their budgets to take on more debt, but not that much. One of two things would have to occur to adjust to higher interest rates: The economy and incomes would both have to strengthen, or home prices would have to fall.

I'm bullish on housing. But we are likely at the bottom of a 30-year fall in interest rates. Any rise is bound to sting anything tied to housing, not least of which will be JPMorgan Chase (NYSE: JPM  ) ) and Wells Fargo (NYSE: WFC  ) , which have made bundles from mortgage banking in recent years. If they don't understand the math now, they will then. 


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  • Report this Comment On July 01, 2013, at 10:59 AM, jberlat wrote:

    Well, since everyone seems to think buying a house for the tax deduction is good, you get more money to deduct from your taxes. (not a reason to buy a house). Rates can't stay low forever.

  • Report this Comment On July 01, 2013, at 11:02 AM, redfox435cat wrote:

    Is motley going to continue to write skewed articles. If you bought a 250k house in 1980. You'd be able to play touch football in your bathroom, with a full-sized football field, tennis court, pool and 6+ car garage

  • Report this Comment On July 01, 2013, at 11:03 AM, VegasSmitty wrote:

    My first mortgage was 14%, and houses were selling pretty good. The difference is now were paying 10 times what the house should cost!

  • Report this Comment On July 01, 2013, at 11:16 AM, foolishlee3 wrote:

    I think the point of the particle isn't how much house 250K would buy you then vs. now, but instead how much 250K in debt will cost then vs. now.

  • Report this Comment On July 01, 2013, at 11:17 AM, foolishlee3 wrote:

    sorry article, not particle.

  • Report this Comment On July 01, 2013, at 11:18 AM, fteixeira wrote:

    Agreed. Idiot article for the uninformed. My parents bought an apartment building back east for $25000 in 1981. That's right, $25000. Though there has been some restoration throughout the years, it is worth over $450000 today. You want to come out ahead in the real-estate racket? Save all your pennies for a fat down-payment, buy when interest rates are sky-high and prices are depressed... not the other way around. $25000 ----> $450000... how ya liking the money printing press chugging along?

  • Report this Comment On July 01, 2013, at 11:21 AM, TMFHousel wrote:

    Yes, the point of the chart is not to compare the value of a home today with 30 years ago, but to compare the monthly payment on a $250,000 mortgage if interest rates return to where they were in previous years.

    -Morgan

  • Report this Comment On July 01, 2013, at 11:21 AM, fteixeira wrote:

    "I think the point of the particle isn't how much house 250K would buy you then vs. now, but instead how much 250K in debt will cost then vs. now."

    No, I think the article is for shock value and skewing reality to make a point the the recent rise in interest rates is no big deal. The problem is that it is an unfair comparison, done intentionally. Hack writing.

  • Report this Comment On July 01, 2013, at 11:23 AM, TMFHousel wrote:

    fteizeria,

    Your parents did very well, but it comes out an annual return of 9.45%, or almost exactly what the stock market returned during that period. Subtract annual real estate taxes and "some restoration," and I'm willing to bet returns were not far ahead of inflation. Several long-term historical studies show that's what a homeowner should expect. There's nothing special about a home.

  • Report this Comment On July 01, 2013, at 11:26 AM, TMFHousel wrote:

    What's unfair about showing what a typical mortgage payment will be if interest rates return to where they were a few years ago?

  • Report this Comment On July 01, 2013, at 11:32 AM, FreebirdSST wrote:

    When they say Americans aren't good at finances, I wonder if its the Americans that feed the world, defend it against tyranny, and have a free market?

  • Report this Comment On July 01, 2013, at 11:41 AM, fteixeira wrote:

    "It comes out an annual return of 9.45%". We lived in it too. So add that averted expense. They did beyond well. And, it wasn't the only apartment building they owned. If rates were to go up to 1980/81 levels, nobody will be buying a 55 year old 2 bedroom 1 bath ranch in Silicon Valley for $750k.

  • Report this Comment On July 01, 2013, at 11:57 AM, TMFHousel wrote:

    ^ And if any interest was paid, that needs to be subtracted.

    I'm sure your parents did well. But there is no historical precedent for home values returning more than the rate of inflation over time:

    http://www.ritholtz.com/blog/wp-content/uploads/2009/06/case...

  • Report this Comment On July 02, 2013, at 5:30 PM, PopeJeffMo wrote:

    Or, to look at the glass as half-full, I made a good decision to refinance my house at 3.25% (fixed) last December. Cheers!

  • Report this Comment On July 02, 2013, at 5:48 PM, zgriner wrote:

    The people that claim the article makes no sense are right on the money.

    It makes no sense to compare raw mortgage payments when trying to prove that lower interest rates help people, if most of the people that it's supposed to help wouldn't save that much because they don't have that much exposure.

    IOW, if you truly want to show the effect of mortgage rates, you have to look at the median mortgage for a given year and see how rates affect that. Look at what real people spend, not some arbitrary mathematical number.

  • Report this Comment On July 02, 2013, at 6:08 PM, VijiSashikant wrote:

    Brilliant! I wrote a blog a few days ago refuting Freddie Mac’s chief economist Frank Nothaft's statement "Higher mortgage rates may dampen some housing market activity but the effect will be muted by the high level of buyer affordability, and home sales should remain strong.”

    How can there be a higher level of affordability? For the same monthly payment of principal and interest, home buyers will be able to afford a slightly smaller home (or lower priced home).

  • Report this Comment On July 02, 2013, at 6:18 PM, weblywwebly wrote:

    While your at it how much is a trillion, and a billion in the US and in England?

    Webly

  • Report this Comment On July 02, 2013, at 6:28 PM, GMZ374 wrote:

    The misleading part is that we would not have been taking out the same size mortgage in 1980 as we would today. And, it's more about the percentage of income that a mortgage represents against today's income vs. 1980. My mortgage for a nice house in the D.C. area in 1980 was for 100k. That bought a 3,000 sq ft house in Great Falls, VA on 2.5 acres, 25 minutes from downtown D.C. The same identical house today sells for about $800k, an 8x increase. However, my income has gone up 8x also. It's about median mortgage size AND percentage of income it represents.

  • Report this Comment On July 02, 2013, at 6:36 PM, xetn wrote:

    "How much will rising mortgage rates cost you"?

    Nothing, I don't have a mortgage or any debt.

  • Report this Comment On July 02, 2013, at 7:07 PM, TMFHousel wrote:

    Again, it's not about comparing home prices today to 1980. It's about showing what a current mortgage on a same-size loan would be if rates return to where they were in various years.

  • Report this Comment On July 02, 2013, at 7:14 PM, fcarone wrote:

    In one respect the article is a particle as it only deals with one aspect of what should be part of the decision to buy a house. There is so much hype, misinformation and misstatements concerning real estate that its hard to imagine that buyers can make a good decision when considering to buying a house. Here are just a few of them:

    1) Affordability is seriously misstated and misunderstood concept as it is derived / calculated from incomplete information, costs and expenses. It underestimates the true costs and expenses of home ownership and does not include future increases in such costs and expenses! . Additionally, just because a person can afford to buy a house does that mean they should buy one , and if so, should they buy at the top of their so-called affordability, which is stretched when prices rise, as they now have.

    2) The worst time to buy a house is when interest rates are low or worse, ultra low. The best time to buy a house is when interest rates are high! If you buy when rates are low or ultra low: a) you may not be able to refinance the property in the future: b) future buyers will pay less than the price you paid for the property as they will have to contend with higher rates; therefore you will lose money! : c) Low interest rates are the reason real estate is again a hot asset class. The only way to benefit from such rates is to buy a property at the price it was at when the low rate was then available. Do some research and you will find this important information. Do not rely on a real estate agent for this information !! It's not in their interest to provide it to you! Get it yourself and protect yourself! Buying at a higher price reduces or totally eliminates the value and benefit of the low rate

    ( which is what got you interested in the first place!). If you buy at a higher price and the interest rate you pay is also higher, you have made a bad deal. When rates rise, prices should fall, not the other way around!! Why would you pay more for a property and pay more for the mortgage too? :d) As I just stated, buyers who pay higher prices lose the value of the low interest rate. If prices escalate, as they now have, buyers are significantly overpaying for the property. Basically, they have gone against their own interests because they did not connect price and terms correctly in their transaction. The goal of a buyer is to negotiate both; favorable price and favorable terms, not to give them away to a seller. : e) The higher the price you pay for a property , the higher your real estate tax bill and insurance will be. Not much of an incentive there either.

    3) Use Zillow or another real estate site to investigate the property and to find out what the seller paid for the property and when he bought it. A recent buy and flip is a sure sign to beware. If the seller bought the property at or near the top of the bubble years, you must understand that you are trading places with that seller who overpaid for the property when he bought it. The bubble market was driven by extensive loan fraud , speculation and lax oversight. Prices were not rational ,sustainable or affordable ! Why would you want to trade places with anyone who got caught up in that mess? If you must buy a house because you really need to, go ahead. But if you are lured by the siren song of low interest rates, the realtor pitch that the property will be more expensive tomorrow, that you are passing up a chance of a lifetime or if tax benefits are too hard to resist, then think again, and again. That's what got people in financial trouble during the bubble years and why they're now trying to get out from under a very bad decision. Do not trade places with them if you can help it. There will be nobody there to bail you out!!

    Sorry this is so long, but making a bad decision will result in you say so -long to your hard earned money!

  • Report this Comment On July 02, 2013, at 9:51 PM, borneofan wrote:

    Thanks TMF Housel. I've run all the numbers I care to about the housing racket. I think part of the reason people can't figure it out is because they don't want to.

    I also suspect that the magnitude of the expenses and rewards is so much larger than other payment streams that it dominates attention.

    My own personal costs would have to capture several years of lost income, since the local employment market is a death knell and I can't sell an unfinished fixer/upper. It is a complicated state of affairs at best.

    House as investment is rarely evaluated objectively, and almost never in relation to other investment opportunities.

  • Report this Comment On July 03, 2013, at 1:30 AM, Seanickson wrote:

    Its happened befor in the early 50's. housing had a brief drop in inflation adjusted median home prices but the pain was minor and relatively short lived.

  • Report this Comment On July 03, 2013, at 8:52 AM, RodgerKing wrote:

    Your chart does nothing more than illustrate the obvious but most people want to ignore your point.

    I have invested in real estate for almost 40 years and I have never seen mortgage rates below 8% (until the last few years). If interest rate go from today's 4% to their normal 8%, it will have a huge effect on real estate and the economy. Probably the best strategy is to buy a house now and get a 30-year fixed-rate mortgage. Have plenty of extra cash for probable correction when the feds try to normalize interest rates.

  • Report this Comment On July 03, 2013, at 9:34 AM, Jamesband wrote:

    A home does not live on its own. The occupants must be responsible to maintain and care for that home as a parent tends a child, and that means Dollars, plenty of them. I’ve been maintaining my home, making the necessary improvements, and performing all the required maintenance mostly on my own e.g. electric, plumbing, painting, carpentry, yard care, all while maintaining the fleet of power tools, and motorized machinery necessary to carry out these task year over year. Add your property and school tax bills, and utilities service cost you can, in most states, double or even triple (N.Y. State) what you pay as a mortgage payment. Now that the flippers have had their way of it for 2 to 3 years, what’s left is expensive housing. It will drop again, and soon, the bubble that once was has quickly re-inflated to three quarters full, not much left to go before ka-boom!

  • Report this Comment On July 03, 2013, at 9:34 AM, devoish wrote:

    Morgan,

    Median family income in the USA is $50k.

    Theoretically I can afford a mortgage payment of

    $50 / 3 / 12 = $1388/ month.

    At 7% it means I can buy a $200,000 house.

    At 10% it means I can buy a $155,000. house.

    Unless there are liar loans, NINJA loans, etc.

    "Lured in by the attractive rates, about 12 percent of the $325 billion in new mortgages made were adjustable-rate loans, known as ARMs, in the first quarter. That compares with 9 percent of new mortgages issued in the fourth quarter of last year, according to Inside Mortgage Finance, a newsletter that tracks the mortgage industry.

    During the housing boom, borrowers — especially those with spotty credit histories — took out ARMs in droves. In 2006, 45 percent of mortgages issued were ARMs. But we all remember how that movie ended: Just as many of these borrowers’ loans were about to reset to a much higher rate, the housing market crashed and many people couldn’t refinance into another loan with a more manageable monthly payment. In many cases, borrowers didn’t fully understand what they were signing up for, since the loans carried complex features that either weren’t disclosed or were hard to comprehend. Others simply got in over their heads.

    “By and large, the ARM market was polluted by the abuses that went on with subprime mortgages,” said Guy Cecala, publisher of Inside Mortgage Finance, adding that “prime” mortgages sold to borrowers with solid credit histories tend to have much clearer terms. Now, “both borrowers and lenders are getting more comfortable with ARMs again.” - NYTimes http://bucks.blogs.nytimes.com/2011/06/21/borrowers-wade-bac...

    US Home ownership rate is currently 66%, and still falling fast.

    There will be two -three years of pushing the savings of the lower first year payments of arm's, articles about how well they work in the rest of the world, pressure to buy before rates go up, and then those 5/1 mortgages will slaughter 10-15% of home purchases made from today until 2017, in 2018.

    The investor people who buy those mortgage securities for income will get slaughtered again, the people who try to hang on to their homes will get slaughtered again, and GS and BOA and JPM will charge their fee and percentage and say "who knew this could happen?" and blame the borrower.

    At least, that is what happened last decade.

    Best wishes,

    Steven

  • Report this Comment On July 03, 2013, at 12:19 PM, akutach wrote:

    Morgan,

    Unfortunately, I can't apologize for the fools who claim that the article makes no sense and then clearly demonstrate that they simply didn't understand your point in 7 lines or less.

    A fine point made.

    This issue was a key part of my recent home purchase decision. Looking forward 5-7 years I determined what I should expect to be able to sell my home should interest go to __% with a range of assumptions for inflation, comparable rents, and wages.

    In the end, I decided that as my bid moved up in a competitive process, that I am still in a safe zone should rates rise to 7%. By this I mean that I can expect at least a return of nominal capital (losing out to inflation) after expenses and effectively paying at or less than prevailing rent rates in the meanwhile. I can take that risk over the time frame.

    Alan

  • Report this Comment On July 03, 2013, at 1:04 PM, ems79 wrote:

    I share Steven/devoish's expectations...

    Rate increases today mean that affordability is reduced.

    People who buy with ARMs in the 2-3% range today are not very likely to be able to afford them in 6-8 years when those ARMs are close to their lifetime caps of 7-8% or more.

    Just a 2-3% increase in rate on a $250,000 mortgage is $400-600/mo, that is well within the range I would expect to kill the average homeowner with a family and a limited budget.

    I believe that the medium/long term effect of rising rates will be lower home sale prices--the math simply does not work, the average family is not making more money year over year lately. If we do see inflation occur that raises incomes it will likely accompany stagnant home prices as the value of a dollar catches up (or should I say down?) to the sale prices.

    The people who took an ARM today with the expectation to sell in 5-10 years may find that they are not going to be getting much more for their home than they paid today. With 5-7% of sales price due as commissions and fees, and the potential for earning dimes on the dollar for improvements made during those 5-10 years the home will end up being a poor investment and will likely not represent much of a stepping stone toward something larger.

  • Report this Comment On July 03, 2013, at 4:48 PM, Johny205 wrote:

    4.5% is still a very low rate. Like you said most people aren't very financially savvy or very good at math. I don't think higher rates will hurt housing that much until they get above 6 or 7%. Those rates have been good historically and the housing market was doing fine at those times. Interest rates should not be as cheep as they have been.

  • Report this Comment On July 05, 2013, at 9:13 AM, mikecart1 wrote:

    This is why I say buying a house is the worst investment you can ever make. Paying $1000-2000 a month to be stuck somewhere for 30 years of my life? No thanks. In 2013, portable and mobile are my middle names.

    Actually they aren't, but you get the picture!

    :)

  • Report this Comment On July 05, 2013, at 11:34 AM, MogumboGono wrote:

    I bought an apartment building in 1984 for $550,000. Interest rate was 13%. Sold it a few years ago for $2.2 million.

    You make money in real estate when interest rates are high, not when they are low.

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