Another Federal Reserve meeting has come and gone, ending with yet another rate hike. With interest rates back in the headlines, let’s explore how changing rates impact the payment on a mortgage.
Another Fed meeting, another rate hike
On Wednesday (September 26), the Fed adjourned its Open Market Committee meeting and announced a 0.25% increase to the Federal Funds rate and Discount rate. Odds are high we may see another 0.25% increase at the next Fed meeting in December. That makes 3 (maybe 4) increases this year, on top of 3 last year, one in 2016 and one in 2015 — for a total of 2% to 2.25% since the end of the recession.
Mortgage rates are not directly impacted by what the Fed does with short term rates, but mortgage rates are on the rise too… and for many of the same reasons. To explore the factors that drive mortgage rates, check out this earlier post.
If rates continue to rise, your home loan payment will change a little… but maybe not as much as you imagined.
Your monthly payment is made up of three, four, or five things: principal and interest, property taxes, homeowners insurance and (if applicable) mortgage insurance and/or homeowners association dues.
Interest rates impact just one part of your payment — the principal and interest.
Calculating your payment
To calculate the principal and interest payment on a loan, you need to know three things: the note rate, loan term and beginning loan balance. Enter this information into an amortizing calculator (like this one, which is my personal fave) and the result is your monthly payment.
An easy rule of thumb
You can play around with an amortizing calculator to get an idea of how changing rates will change your payment. Or, with a handy rule of thumb, you can dispense with the fancy calculator. On a traditional 30 year loan, at current rates:
0.125% change in rate = ~$7.60/mo per $100,000 of loan a balance
This math is scalable:
• If you plan to borrow $400,000, multiply $7.60 by 4. $7.60 x 4 = $30.40 per month.
• If the rate is .5% higher (0.125% x 4 = 0.5%) on your $400,000 loan, just multiply by 4 again. $30.40 x 4 = $121.60 per month.
Fun with spreadsheets
If you prefer not to do the math yourself, I’ve got you covered. I built a spreadsheet you can use to figure the payment on any size loan.
And because the exact change to your payment will shift as rates rise and fall and vary if you opt to take out a shorter term mortgage, I’ve included a range of note rates and loan terms (30 year, 20 year and 15 year).Plug in a loan amount and you’ll see the principal and interest payment (not including taxes, insurance, mortgage insurance or HOA dues) at note rates ranging from 3.0% to 7.0% on 30, 20 and 15 year terms.
The takeaway… don’t dawdle
Although I am certain you can think of lots more fun ways to spend $30, $60 or $120 per month than a slightly bigger mortgage check, a touch higher rate is probably not cause for panic. If you’re mulling over a move or remodel or some other project that could involve a new mortgage, don’t panic, but also don’t dawdle.
If rates continue to rise, doing your planning and securing your mortgage sooner, rather than later, will save you a little bit of money every month. You can celebrate with movie tickets, dinner out, a cute pair of shoes, or… whatever other $30, $60, or $120 monthly treat you can imagine.
Bonus takeaway… consider debt consolidation
Although long term mortgage rates are not directly impacted by Fed rate increases, short term rates are. If you have a home equity line of credit or credit cards, your rate goes up 0.25% every time the Fed raises rates 0.25%… and more rate increases are projected.
Now could be a good time to look into refinancing or otherwise consolidating your debts into a fixed rate loan.
We can help you plan
To explore loan options of any kind — for a purchase, a refinance, debt consolidation, home improvements — give us a call (or email) any time. We’ll will help you define your plans, explore financing options, strategize and execute.
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