How Do Rate Changes Affect Mortgage Payments

The Federal Reserve held interest rates today. What does that mean to a buyer? A 30 year loan at 6% interest costs $500 per month per $100,000 borrowed in interest. Add .25% and the payment goes up to $520.83. On a $400,000 loan, that’s an additional $999.84 a year in interest payments. A drop in rates has the same effect; saving $999.64 a year.End

27 Comments on “How Do Rate Changes Affect Mortgage Payments

  1. The vast majority of first mortgages for primary residents are tied to the 10 year and LIBOR … not the Fed Funds Fate. That’s why you haven’t see a correlation between the precipitous drop in the Fed Fund rate and mortgage prices … or hadn’t you noticed that the four week moving average for mortgages have been going up by over 50 basis points recently? Mortgage Back Securities (Bonds) respond to inflationary pressures. Inflation reduces the rate of return of a fixed rate instruments … and mortgages to consumers more expensive.

  2. Why not just call the 0.25% $1,000? That’s 0.25% of $400,000 without the compounding. Do the few pennies over the year make any material difference?

    Also rather than worry about the 0.25% on the margin, maybe a borrower should be more concerned about the base 6% or more…

  3. haha’s comment above appears to be a forged. It comes from a unique IP address compared to all of the previous comments by haha. The commenter above misses the fact that the post gives you the blocks to build the payment of a bunch of loans, not just the $4000,000 example.

    A $300,000 loan at 6.5% will cost $600+($20.83×2)x3. The $20.83×2 comes from two .25% increases above 6%.

  4. Building Blocks:

    .25% of $400,000 = $1,000.

    $300,000 loan at 6.5% = 300000 * .065 = $19,500.
    $300,000 loan at 6.0% = 300000 * .060 = $18,000.

    1,500/72 = 20.83, as you suggest.

    72 = 12*2*3

  5. The Fed has been dropping or holding the over night interest rate for months now yet mortgage rates seem to be increasing. Could it be that the banks need to make a bit of money to make up for the bad investments? It’s pretty much over my head, any one care to explain or speculate what is going on?

  6. Bearlee, Rates are going up because lenders and the GSEs are scared and hoarding cash or cash equivalents. Credit wave 4 is here.

  7. The difference in the mortgage payment between rates of 5.99 percent and 6.75 percent rate on a $400,000 home loan is an extra $210 a month, or $75,600 over the full 30yr term.

    Portland housing is down say 5% YOY. Which on a $400,000 home is $20,000.

    So, after all the hand wringing over PDX home prices, sitting on the sidelines over the last year is going to wind up costing you over $50,000 if you try to get in now. Interest rates are only going to go higher, so that hole will just be getting bigger.

    Looks like the brokers were right, it was A Great Time To Buy!

    Wow, dollar’s beaten up, out of control oil, commodity prices through the roof, job numbers aren’t good+. President Carter has to do something about this stagflation!

  8. In two years that $400K house will likely be selling for $325K. Now do the math with a 8% interest rate. Don’t forget about those great tax savings home ownership brings that NAR likes to talk about.

    I am curious if it evens out, increased interest rate/lower home prices and vice versa.

  9. Sorry Bearlee, but I think you know that an almost 19% decline in price from where we are now isn’t in the cards.

  10. No one knows what’s in the cards, it’s anyone’s guess how low things will go. For years people said it wouldn’t happen at all in Portland. If you would have told someone in 98 that houses here would double or more by 08 they would have scoffed then too.

    PS. IP address changes don’t always equate to identity changes.

  11. It’s all about Purchasing Power–As payments go up, prices go down. Instead of paying that extra interest, just pay a lower price.

  12. Think about it this way, many folks are still pricing their homes as if they have been appreciating at 10% each year. Say a house is listed at $400K but all the neighbors have sold at $385K but the 400K house is so special, yeah, right. And given that C-S has recorded a 5% drop already (you know how they get their #’s) the slide is just beginning. I don’t think it’s too hard to imagine home prices dropping 19% from listing prices. Key words “FROM LISTING PRICE”

    In a buyers market prices are quite volatile. Just look at Lake Oswego stats from http://propertyblotter.com/

    Some of those properties took 20% haircuts from their listing price.

    So I still stand by my belief that a 400K house can and will drop to $325 in the next couple of years. And as it becomes more apparent to sellers that this market ain’t recovering any time soon we will see more “Price Reduced” signs pop up.

    A properly priced house will sell in any market…we can all agree on that. Where we disagree is what is a proper price.

    Another piece to chew on…putting 20% down to avoid PMI…it’s a bit easier to get 20% for a $325K home than a $400K home. Minus the FHA’s and VA loans PMI is playing a bigger role in affordiblity assuming PMI rates are going up as the defaults continue to skyrocket throughout the nation.

    How many folks avoided PMI with the 80/20s that are no longer available?

  13. “but I think you know that an almost 19%”
    Agreed…we might see double that!

    “sitting on the sidelines over the last year is going to wind up costing you over $50,000 if you try to get in now.”

    put down the bong, thrifty.
    a sale price now locks the knife catcher (errr…prospective home buyer) into a completely daft price forever. on the other hand a mortgage can be refinanced at any time. your theoretical argument is moot…the fed is going to start cutting again soon. 3% mortgage in 2010 anyone?


  14. Thrifty, I have yet to meet one person who has bought in the past two years who is happy with being upside down and those who aren’t upside down but know they can’t sell right now for what they paid for aren’t too thrilled either. How would you feel buying now just to get that ‘great’ interest rate and risky just break even in five years or more?

    With today’s shaky economy, yes, even in PORTLAND, no on can say for sure they won’t be forced to move for employment. It’s not something I would recommend chancing unless you had a seller willing to come down significantly. Most sellers are still living in 2007.

  15. Well prices are edging back up and the people are going to be paying 8% on mortgages pretty soon.

    The fed doesn’t control mortgage rates, the fed funds rate is the “target rate” for overnight lending between banks. If the Fed cuts again and lets inflation get worse, that reduces the return on fixed rate investments, which means mortgage rates go higher. Unfortunately squeezed had to withdraw from that economics 101 class at PCC so he made a little boo boo there.

    So what moves mortgage rates? Supply. Demand. Competition for money. Inflation. The Economy. Expectations. Hmmmmmm? Anything on that list point you toward 3% mortgage rates in 2010?

    You people have been predicting 20-40% drops for months and months and months. You can only scream the sky is falling so many times before people stop looking up and start looking forward. After the monster gains we’ve put on over the last few years, being down less than 5% is mild correction. Portland doesn’t have the sprawl and never had the massive number of new housing starts to put us in position for the declines your seeing in LA, Phoenix, Vegas, and Miami.

  16. Hey Thrifty-

    Have you not noticed what’s going on here?

    Let me point out the facts.

    In October 2007 8549 NW Ryan was listed at $824,950.

    Today Charles says the place sets “properly priced,” but empty and unsold at $679,000.

    Some very basic math suggests that this has already had listing price reductions of $149,950, or 17.7%.

    Again it sets empty and unsold.

    We’re only $15,040 away from a full 20%.

    I’ll be watching to see if, as you predict, the price actually goes up. Most comical. I suspect to get the properly priced property sold there will be further reductions in price.

  17. Didn’t you get thrown off this forum?

    Price drops are determined by sales pairs, or you could use average sales price of an area, or something like that to make your case. Taking one properties initial list price doesn’t give you a starting point to figure out if a property has depreciated. Its arbitrary, that first agent could have listed it for $2 million dollars. When Charles got it and repriced it would that constitute a 65% price drop?

    I will no longer be responding to any of your posts. I responded to this one because sadly I believe a lot of people hold that misconception.

  18. Hey Thrifty-

    Maybe you should actually read what you are responding to. Bearlee said, “I don’t think it’s too hard to imagine home prices dropping 19% from listing prices. Key words “FROM LISTING PRICE” You too can read this. See above. Maybe you could ask bearlee what her point is, but it sounds like listing prices are too high in her opinion. You probably wouldn’t read her post anyway.

    Oh, and let’s not forget that it’s the homeowner that signs the contract stating the original listing price.

    I failed to recognize how comical this place can get with you around.

  19. That is an excellent and well thought out post. I am, believe me, well aware that my opinion is just that, another opinion in a chorus of voices, and I certainly have no crystal ball. I think my fundamental view is you that you have to take a side and be ready to accept the consequences if your wrong, which time may certainly prove me to be.

  20. Mr Thrifty appears knowledgeable w/ respect to financial instruments but that gives him no crystal ball. The home built adjacent to me in Washington Park priced at 879K then moved up again to 989K and when completed listed at 1.1M. It sat for a year. The bank took it over from the builder and sold this year at 840K after 2 years. I don’t care what % you put on it, it still doesn’t look good. And it depresses comps and sends buyers for the sidelines. It has a downward pressure on expectations. And as Thrifty said, Supply and Demand are psychological forces that can destroy markets — if only temporarily. But the question is: if you are the one who got wiped out – it is an eternity for you. You will never see that money back. The “market” may recover, but your a$$ is toast.

    I witnessed the run up in the LA housing market from 1984 to 1989. Then, poof, it tanked. But not all at once. It tanked slowly, like molasses rolling downhill. No one believed that it would take as long as it did to recover. 2 Properties I purchased, a condo for 279K and another for 219K lost 30% of their value w/in 3 years of purchase. No one wanted to believe it. We sat on the places and each year told ourselves the bottom has been reached. And each year, it just crept slowly downward. Eventually, owners panic and then accept whatever they can get. I unloaded both properties 10 years later for 220K and 420K respectively. That is after having to investing $$ to get them ready for sale a decade later. I’d consider those deals terrible losses. LA, however, was a different market than SF. SF was going gangbusters during most of that time. For the record, one property was in Bel Air and the other in a very high end suburb where Tom Hanks and Steven Spielberg live. The locations were ideal. The point is, location matters, but if too many units go up for sale at once, and you need to unload, buyers as a group can wait you out. I am not so arrogant as to laugh off dire predictions and folly anymore. HAHA’s points are very well taken. We could very reasonably see a 20% reduction in prices over a 3 year period. It doesn’t come at you all at once. It creeps up on you and suffocates you slowly. The less hardy panic, dropping comps around you. Buyers retreat to the sidelines, opportunists put in really lowball offers. Some accept and further drive prices downward. Expectations of buyers then reset in the negative and you see that impact on offers and sale prices. What drove things up up up can also drive things down down down. Markets respond to irrational exuberance as well as irrational negativity just the same.

  21. “view is you that you have to take a side”

    “Take a side” works for sports but not for investing, son.

  22. Sorry your just not smart enough, interesting enough, or authoritative enough to pull off being condescending.

    Don’t overreach.

  23. love the ad hominem, thrifty.

  24. That actually can’t be an ad hominem because I’m not replying to a factual claim. I mean theres no substance to the statement you made? Right? Once you pull the trigger on a security you’ve taken a side, unless your just throwing darts.

    Anyway, I’m not sure why a person would “invest” without agreeing with some aspect of market sentiment. Now run along.

  25. “Once you pull the trigger on a security you’ve taken a side, unless your just throwing darts.”

    Google hedging and risk management.

    “I’m not sure why a person would “invest” without agreeing with some aspect of market sentiment.”

    You’ve got it exactly backwards.

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