How Much Record-Setting Mortgage Rate Jump Could Add to a $400K Loan

Mortgage rates had the biggest weekly increase in four years on Oct. 15 with the average rate on a 30-year fixed mortgage having jumped from 7.28% to 7.40%, Freddie Mac reported. After that dramatic spike, rates inched down to 7.24% on Oct. 29, but the possibility of rates rising higher again is still very real.

With home affordability near record lows, every increase in rates puts additional strain on potential homebuyers. Here's how much recent mortgage rates could add to a $400,000 loan.

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What Higher Mortgage Rates Mean for a $400K Loan

An increase of a quarter-point or even a half-point in mortgage rates may seem trivial. With the size of the average mortgage, however, it can amount to tens of thousands of dollars in interest over the course of a loan. We used U.S. Bank's mortgage calculator for the following monthly payments.

These payments represent principal and interest only. They don’t include typical additional housing costs like property taxes and homeowners insurance.

The jump from 7.03% to 7.40% can add over $36,000 over the life of the loan, assuming the mortgage is never refinanced or paid off early. Even at the current rate, it still can add over $20,000 over the life of the loan.

When Does a Mortgage Payment Become Too Expensive?

When it comes to mortgage payments, what may be out of reach for one household might be quite comfortable for another. Generally speaking, lenders recommend keeping monthly housing expenses to 28% or less of gross monthly income.

For a household earning $120,000 annually, for example, a $2,800 monthly housing expense would be right at the line. For those earning $72,000 annually, that same cost would run closer to 47% of monthly income.

Even a household earning $10,000 monthly might struggle with a $400,000 mortgage at 7.24%, as principal and interest alone would be about $2,726 per month. Add in taxes, insurance and other costs and there might not be enough room in the budget.  

How Buyers Can Keep Their Mortgage Payments Manageable

Higher rates shouldn’t necessarily keep buyers out of the market, but they can change the equation as to how much house is really affordable.

As mortgage lending is a competitive industry, it can pay to shop around. Even a small difference in quoted rates can result in thousands of dollars of savings over a 30-year loan.

Those looking for lower rates may want to pay mortgage discount points upfront, although the benefits depend on how long the buyer keeps the loan. Paying a large amount of interest upfront, which is effectively what mortgage points accomplish, could backfire if the mortgage is refinanced or the home is sold relatively soon.

More obvious options to trim the amount of a monthly mortgage payment include buying a less expensive property or putting more money down. Both options reduce the amount borrowed, which results in a lower mortgage expense.

Just because you can qualify for a $400,000 loan doesn’t mean that you should borrow the entire amount. A comfortable household budget is one that has plenty of room for everyday expenses, financial goals and a housing payment.

This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.

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