How does the Interest Rate Affect your Monthly Payments
What an increase in your interest rate means for your budget.
Mortgage
Let’s say your mortgage is $200,000. If you’re allotted 5 years to pay off your home, your monthly payments will be roughly $3,333. However, when paying off your home in monthly installments, you have to factor in your interest rate. For example, when you buy your home, you are offered an interest rate of 5%. That means, each month, you’ll be charged an extra $167. Five percent of $200,000 is $10,000 – split up into 60 months. Now, your estimated monthly payment is $3,500. Let’s say your interest rate is guaranteed for one year.
Increased Interest Rates
At the start of your second year, your interest rate increases to 6%. Now, you have to reconfigure your monthly payments. Six percent of $200,000 is 12,000. Now your monthly payments will be $3,533. This is an increase of $33 per month, or $396 annually. If your interest rate suddenly jumps to 9%, your monthly payments will increase to $3,633. While a $100 monthly increase may not seem like much, this adds up over the years.
It Adds Up
Using our original mortgage of $200,000 with a 5% interest rate in the first year, let’s calculate the price of a 5% increase in interest rate. The first year, our homeowner paid $42,000 in total. Let’s say that in year 2, the interest increased to 8% and remained at 8 percent until the house was paid off. At an 8% interest rate, the monthly payment would be $3600. For four years, this would come out to $172,784. Add the first year’s expense and the homeowner ended up paying $214,784 for the home over a span of 5 years. In total, our homeowner pay $14,784 more for the home, due to interest.
Other Factors
In this situation, only the interest rate fluctuated. For most buyers, five years is an extremely short period of time to pay off such a large amount. Most notes range from 10-30 years. If you’re paying out a mortgage over 30 years, an increasing interest rate can really add up. At 5% interest for 30 years, the buyer ends up paying $210,060 – an extra $10,060 in interest. However, at a 10% interest rate, the buyer ends up paying a whopping $19,960 in interest – nearly $20,000 more than the original price of the house.