Where Are Mortgage Rates Now?
How Rates Impact Your Monthly Payment
Interest rates have been a thorn in many people's sides over the past 2-3 years, with rates doubling during this period and pricing many out of the real estate market.
However, with the 30-year mortgage rate now at its lowest point since April 2023, some buyers may be reconsidering the idea of making a move.
I typically recommend opting for a 15- or 30-year fixed mortgage to lock in an interest rate. If rates fall during that time, you can always refinance.
It's worth noting that rates on adjustable-rate mortgages (ARMs) can be more favorable than traditional 30-year fixed rates. For example, you might qualify for a 6.5% 30-year fixed mortgage, or you could choose a 5/1 ARM at 5.75%.
For those unfamiliar, a 5/1 ARM means your rate is locked in at 5.75% for the first five years, after which it adjusts to the prevailing market rates.
This approach carries risk, especially in a rising rate environment, as you're betting that rates will either fall or remain flat over the next five years, allowing you to lock in a longer-term rate before the adjustment period.
But let’s walk through an example scenario to show how interest rates dictate your monthly costs and overall financial picture:
Assumptions:
Home Price: $800,000 in Boston, MA
Down Payment: $40,000 (5%)
Loan Amount: $760,000
Term: 30-year fixed
Interest Rate: 6.5%
Principal & Interest: ~$4,805/month ($57,660/year)
That covers your principal and interest payments, but as we know, owning a home comes with additional costs that need to be factored in:
Property Taxes: $7,020/year. Usually paid quarterly
Home Insurance: $1,800/year. Paid Annually
Maintenance: $650 - $800/month ($8,000 - $10,000/year). Paid every damn day…
**FYI - you typically have a mortgage escrow account that is used to collect and pay property taxes and insurance payments on a home for you. It is still your money but they handle the payments logistically**
This doesn’t even include potential Homeowners Association (HOA) fees if you’re purchasing a condo. In Boston, the average HOA fee is about $400 per month.
I used 5% as a down payment in the example above but some lenders only require 3.5%.
Just understand how your down payment plays a significant role in your monthly costs. A higher down payment means a lower monthly payment, immediate equity in your home and potentially avoiding Private Mortgage Insurance (PMI), an additional cost for those who put down less than 20%.
On a $760,000 loan, this could add hundreds of dollars to your monthly payment.
Your credit score also impacts the interest rate you’ll qualify for. A better credit score could mean a lower rate, reducing your monthly payment and the overall cost of your loan.
If you were able to lock in a 5% interest rate instead of 6.5%, your principal and interest payments would drop to around $4,080 per month, saving you $725/month of interest.
There are also opportunities for you to purchase “mortgage points” to lower your interest rate.
These may be big numbers for you and now may not be the best time for you to purchase a home.
Don’t get discourage. There are other goals you can work towards.
But here are other factors to consider in the meantime:
Cash is king in this process. If you ultimately want to purchase a home, start putting cash into a high yield savings account.
There are different loan types with different terms. Make sure you know exactly what those are and ask for options.
Some of these costs will change depending on location. Boston offers a nice perk known as the residential exemption. If you live in your Boston home, you are able to reduce your property taxes substantially.
Renting out a few bedrooms will help ease the burden of the monthly payment. Run the numbers to see if you may be able to be cash flow positive if you rented the place out entirely.
Stress test your finances. Can you survive a few months with no renters? If you lose your job, can you maintain the monthly payment? Things go wrong in real estate all the time, be prepared.
Interest sucks - in the above example, $760k loan, 6.5% interest rate, 30-year term, you end up paying around $970,000 of interest…
Should you need any help or have questions about buying a home, please reach out!
Read more here, here, and here.
**If you are still reading this far, I just want to say thank you. Today is the ole birthday and I am filled with so much gratitude that I’m surrounded by so many great people. Thanks for reading and please for the love of god give me feedback and topics!!**
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All rates disclosed above are not 100% accurate as you need to consult a professional.
All investing includes risks, including fluctuating prices and loss of principal.