If you’re a physician and thinking of buying a home, you’re probably paying attention to current mortgage interest rates. You may be reading articles or hearing news that rates have recently risen.
So how do rising interest rates affect your mortgage payments and how might they impact the value of a home you purchase today and want to resell in a few years?
Obviously the higher the interest rate on your mortgage, the higher your monthly payment and the more you’ll pay over the life of the loan. Interest rates affect how much home you can afford. A full percentage point increase in a mortgage rate reduces one’s purchasing power by 12 percent. Also, the more you borrow or intend to borrow, the more a move in interest rates will impact your loan, payment, and what you can buy.
If you borrowed $350,000 on a 30-year fixed mortgage with a rate of 4.16 percent, your monthly principal and interest payment would be $1,703. If the rate increased to 4.25 percent, the monthly payment only goes up $1,722, or $19. With a 4.5 percent rate, the homeowner would pay $1,773 a month. At 5 percent, principal and interest would cost $1,879 a month.
If you borrowed $350,000 on a 15-year mortgage with a rate of 3.5 percent, your monthly principal ad interest payment would be $2,502. An increase to 3.75 percent only raises your monthly payment to $2,545, while a 4 percent mortgage rate produces a monthly payment of $2,589.
For physicians who have high earning potential, it would take a large rate increase to have a significant impact on their monthly payment. Rates have only moderately fluctuated in the last several years. The average annual rate on a 30-year fixed mortgage has been between 3.65 percent and 4.17 percent in the last five years.
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Another common concern is what happens if interest rates increase significantly after you’ve purchased a home.
It’s widely believed that rising interest rates negatively impact home values. The theory is that potential homeowners who would buy at a certain price range with a lower rate will have to settle for lower priced homes when rates increase. It’s also believed that significant increases in physician mortgage loan rates reduces the demand for home buying.
The reality is that home values are influenced by a myriad of factors, including the state of the economy, the supply of available homes in a particular area, and the overall appeal of a neighborhood, city or region.
Plus, mortgage rates often rise in correlation with overall financial interest rates. The latter typically increase as the economy gets stronger and are lowered when the economy weakens. Therefore, it’s likely that increases in mortgage rates will correspond with economic strength, which would bode well for home values.
In addition, homebuyers generally figure out how to account for a rate increase to get the home they want, whether it’s stretching their budget or finding extra money for a larger downpayment.
While higher interest rates may not affect the value of the home you purchased, they may impact what you can do with it later. If you buy today and rates increase significantly, it removes your ability to financially benefit from refinancing later.
An increase in mortgage rates will also negatively you if you financed your house with an adjustable rate mortgage (ARM). With an ARM, the lender will adjust the interest rate after an initial fixed period, typically five, seven, or 10 years. If rates overall have increased between the time you bought the home and the end of the fixed-rate period, your interest rate and mortgage payment will increase.
For example, if you purchase a $350,000 home using a 5/1 ARM — which offers a fixed rate for the first five years and an adjustable rate each year after — you may get a mortgage rate of, say, 3.5 percent in those first five years. Your monthly principal and interest payment would be $1,576.
Now assume that in five years, rates return to where they were before the financial crisis. That means your rate may increase to 5 percent. This would increase your monthly payment by as much as $300.
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Colin is the Founder & CEO of LeverageRx, an online lending and insurance marketplace for doctors. Colin has over 10 years of experience in financial services and is a licensed life and health insurance agent.