The average interest rate on a 30-year fixed mortgage just hit 8% for the first time in more than two decades. While this is clearly much higher than the 3% (or lower) rates we were seeing just two years ago, what exactly does this mean to you if you’re planning to buy a home?
To illustrate just how much of an effect this higher mortgage rate can have on your housing costs, here’s a rundown of how much the typical $500,000 home costs per month now, compared to how much you would have paid if you had bought when rates were low.
How much does a $500,000 house cost per month now?
As mentioned, the average 30-year fixed mortgage rate just hit 8% for the first time since 2000. Assuming a 20% down payment, this means that the monthly mortgage payment on a $500,000 home would be $2,935.
However, not all borrowers can come up with a 20% down payment, which would be $100,000 on a half-million-dollar home. If a borrower put 5% down on a conventional mortgage, not only would they have to finance $475,000, but they’d also have to pay private mortgage insurance, or PMI. This would make their monthly payment $3,683.
Now, this is just the principal and interest portion of your mortgage payment. You’ll most likely be required to pay property taxes and homeowners insurance premiums along with your monthly mortgage payments, and for this reason, mortgage payments are often referred to as PITI (principal, interest, taxes, and insurance).
The costs of property taxes and homeowners insurance can vary significantly based on location, but using the national averages, someone buying a home worth $500,000 can expect to pay $5,550 per year (about $463 per month) in property taxes and another $3,033 per year (about $253 per month) for insurance.
Putting it all together, this means that the average person buying a $500,000 home today with 20% down would have a $3,651 monthly housing payment. If the buyer put 5% down, their payment would be $4,399, including the cost of private mortgage insurance (PMI).
How much a $500,000 house cost per month two years ago
Two years ago, in October 2021, the 30-year mortgage rate was hovering around a 3% average rate. But that’s not the only factor to consider. Since that time, the average home value has risen by 12%, so a home that costs $500,000 today could be reasonably expected to have cost $440,000 two years ago.
Not only that, but property taxes and insurance are generally based on home value, so those would have been lower upon buying a home two years ago as well.
I’ll spare you all of the math here, but the end result is that a home that costs $500,000 today would have come with a monthly PITI payment of $2,114 with a 20% down payment in 2021. With 5% down and PMI, the payment would be $2,566 per month. These figures are a staggering 42% less than what the same home could be expected to cost today.
Is now a terrible time to buy?
The cost of homeownership has certainly increased, but it could still be a smart time to find a good mortgage lender and buy a house. The market has cooled off quite a bit as rates have risen, and buyers generally have a better selection of homes (and more negotiating power) than they did a year or two ago.
Plus, it’s important to keep in mind that a 30-year mortgage rate isn’t necessarily permanent. If rates fall, it’s fairly easy to refinance a home mortgage in most cases. So, assuming you can afford the monthly payment at today’s rates, it could still be a good time to get the process started.
