Most people believe that if interest rates jump up, the effect is not significant. I’m here to tell you that it’s a HUGE difference.
Imagine you had a $200,000 mortgage. With a 5% rate, your monthly payment is $1,163/month.
Your first payment will include $825 in interest charges. This reduces every month, however we’ll use it as an example.
Most people believe that if your interest rates goes from 5% to 6% (a 1% increase), your payments won’t change very much.
What they don’t realize is that your monthly payment just increased by 20%.
The first month’s interest amount now jumps up to $988, and the per month total cost rises to $1,280/month at 6%.
That’s a difference of $127 per month in payments for a 1% increase, or about 10% more per month.
While interest rate is not the only important thing about your mortgage, it matters. A LOT. Small changes in interest rates can have huge effects on your monthly payments and the amount of interest you pay over the life of your mortgage.
Next post I’ll discuss the importance of time, and its effect on your payments.