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:
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.