How Much Does Interest Rate Affect My Payment

How Much Does Interest Rate Affect My Payment

People often get concerned about how much interest rates are going to affect your payment...

The answer is, not a whole lot on a monthly basis but it can be a lot long term. 
One thing we need to differentiate though is the difference between APR (annual percentage rate) and interest rate. 

Annual Percentage Rate (APR) is an expression of the effective interest rate that the borrower will pay on a loan, taking into account one-time fees and standardizing the way the rate is expressed

Interest Rate: Interest is a fee on borrowed capital. Interest rate is a "rent on money" to compensate the lender for foregoing other useful investments that could have been made with the loaned money.

One of the things that is potentially confusing about that it is a projected number based a variety of assumptions, most of which don't happen.  Most people don't have a loan for 30 years.  The minute you make one extra payment, sell before the 30 years is up, are late on your mortgage etc etc etc...that number goes out the window.  So it's a good figure to use when initially comparing loan products because it gives a uniform "whole" picture but after that is pretty much meaningless.

As far as interest rates and payments...lets do some examples.  There are 4 parts to monthly mortgage payments referred to as "PITI", Principal, Interest, Taxes and Insurance.  You can escrow for taxes yourself but most companies will hit you with a higher rate because they prefer to escrow for you due to the fact that property tax liens supercede mortgage they can lose the property if you don't pay your property taxes.  Because of new escrowing regulation we don't see the "over-escrowization" that encrouaged people to want to escrow their own taxes and insurance. 
So lets say we have 123 Main St.  The purchase price is $200,000.00.  The property taxes are $1,200 and the insurance is $1,200.  So taxes and interest together are $2,400 divided by 12 months is $200 per month. 

 At 4%, 4.5% and 5% interest for a VA loan:

VA (VA is zero down and does not have mortgage insurance, however it does have an upfront funding fee which gets added to the loan, the funding fee is different depending on first use or subsequent use):

Loan Amount: $204,300
Down Payment: $0
P&I: $975.36
T&I: $200
Total Payment: $1,175.36
P&I at 4.5%: $1,035.16
Total Payment at 4.5%: $1,235.16
P&I at 5.0%: $1,096.73
Total Payment at 5.0%: 1,296.73
So the difference is about $120 between 4% and 5% in your payment.  Breaking that down further you can expect you payment, in that price range to jump about $30 for every quarter percent you go up in rate.

Now if you go up higher in price....the interest rate jump affects your payment more.  So lets use a conventional max loan with 20%+ down so we avoid Mortgage Insurance, which complicates numbers because the amount of mortgage insurance is determined by your credit score and Loan to Value Ratio. We'll leave taxes and insurance out because they don't affect the payment difference between interest rates as evidenced by the previous example.

Purchase Price: $500,000
Loan Amount $417,000 (conventional limit)
P&I at 4.0%: $1,990.82
P&I at 5.0%: $2,238.35

So the difference is about $250 which is porportionally the same as the increase in monthly amounts when we're looking at a loan for half as much....but the dollar amount is of course going to be a little larger difference. 

So why is it important to know this?  Well if you're concerned about interest rates going up...but now isn't a good time to sell, you should know that if they creep up a little it's not going to blow your game plan out of the water.  This is a good thing to understand if you're looking at new construction where you're waiting months and months for the home to be built. 

There are many different loan programs and mortgage insurance, interest rates, down payments, program type etc can all affect your payment.  If you're curious about the different options we would be happy to chat!

Sarah Rowan Headshot
Phone: 970-397-5774
Dated: December 15th 2014
Views: 346
About Sarah: Sarah was a licensed real estate agent for 10 years before transitioning into the mortgage industry ...

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