2.5% vs 6.5% interest rates- What does that mean for your budget?

Non surprise! A mortgage interest rate increase from 2.5% to 6.5% significantly impacts a home buyer's purchasing power.

Let's use an example of a $750,000 home like the one above to illustrate the effect:

1. **At 2.5% Interest**:

- Monthly Mortgage Payment: With a 30-year fixed-rate mortgage, the monthly payment would be approximately $2,955.

- Total Interest Paid Over the Loan Term: Over the life of the loan, you'd pay approximately $333,742 in interest.

2. **At 6.5% Interest**:

- Monthly Mortgage Payment: With the same loan term and amount, the monthly payment increases to about $4,747.

- Total Interest Paid Over the Loan Term: The total interest paid over the life of the loan would be approximately $680,698.

Now, let's compare the two scenarios:

- **Monthly Payment Increase**: The monthly mortgage payment increases by approximately $1,792 when the interest rate goes from 2.5% to 6.5%.

- **Total Interest Paid Increase**: The total interest paid over the life of the loan increases by approximately $347,956.

These changes significantly affect the buying power of the homebuyer:

- **Lower Buying Power**: With the 6.5% interest rate, the homebuyer's ability to afford a $750,000 home is reduced. They may need to lower their budget or look for a less expensive home to maintain the same monthly payment.

- **Higher Cost of Borrowing**: The increased interest payments mean that, in the long run, the homebuyer pays substantially more for the home compared to the lower interest rate scenario.

In summary, a mortgage interest rate increase from 2.5% to 6.5% reduces a homebuyer's purchasing power, leading to higher monthly payments and significantly increased interest costs over the life of the loan. This highlights the importance of securing a favorable interest rate to maximize your buying power and long-term financial well-being. We have multiple expert lending partners that are open to helping our clients understand their buying power - even if they chose not to use them as their lender. Contact the Westfield Team for more info.