If you’ve been scanning the headlines lately, you’ve probably seen that mortgage rates rose once again.
And they did so despite yet another interest rate cut by the Fed, which has a lot of people pretty confused.
I’ve already touched on the strange relationship, but today I wanted to talk about actual numbers.
Yes, mortgage rates rose over 7% again this week, and yes, they increased by a sizeable 25 basis points (0.25%).
But how does that affect the typical monthly mortgage payment? You may be surprised.
Mortgage rates have risen back into the 7s this week
It’s no secret that this week has been tough on mortgage rates.
They were actually heading down after Thanksgiving and into early December before bouncing back up on Wednesday.
The 30-year fixed neared 6.625% before an abrupt reversal to 7.125%.
What prompted the move was a new dot plot from the Fed, which detailed fewer rate cuts in 2025.
Fed Chairman Powell also indicated that inflation was stickier than they initially thought back in September and that unemployment was not quite as bad.
Translation: the economy is doing better than expected, so further rate cuts may not be necessary.
And higher inflation could still rear its ugly head again if economic growth continues at a warmer clip.
Of course, this flip-flopping is super common in all financial markets. This is why you see stocks rise one day and fall the next. Then rinse and repeat.
New economic data is released almost daily, all of which can affect the direction of mortgage rates.
So what was said a few days ago may be countered by new information released today. And speaking of, the Fed’s favorite inflation gauge, the PCE report, turned cooler than expected.
As such, the 10-year bond yield (which correlates very well with mortgage rates) has fallen back below 4.50.
That means mortgage rates will fall today, reversing some of the painful increases seen since Wednesday.
But still, how big of a difference does a quarter point higher mortgage rate really make?
Let’s look at the difference in price of a typical home purchase
Since Wednesday, mortgage rates have risen from about 6.875% to 7.125%, or about 25 basis points (0.25%).
The median home price for an existing single-family home was $406,000 in November, according to the National Association of Realtors.
Assuming a buyer comes in with a 10% down payment, which is typical for a first-time home buyer these days, the loan amount would be $365,400.
Now let’s compare the principal and interest portion of the monthly payment based on the different mortgage rates.
6.875%: $2,400.42
7.125%: $2,461.77
Despite the big jump in interest rates this week, your typical FTHB would only be out an extra $60 each month.
That doesn’t seem like a significant amount for a monthly mortgage payment. Of course it is higher, but not by much.
Even a full half point difference, in the case of a rate of 6.625% vs. 7.125%, would only be about $120 per month.
Yes, still more money, but again, $120. We all know that $120 doesn’t go very far these days and it can simply equate to a meal out with the family.
If a small change in mortgage rates makes or breaks you, maybe it wasn’t right to begin with
Now there are more costs that go into a home purchase in addition to the mortgage loan itself. There are property taxes that have increased a lot in recent years, especially in certain states.
And there is homeowner insurance, which has also increased in price as insurance companies have raised premiums due to increased risks related to climate challenges.
Finally, there is the change in house prices, which have also increased significantly over recent years.
But the rising costs are all pretty old news at this point. The only thing that really changed this week was mortgage rates.
And if you’re considering a home purchase, a 0.25% rate difference shouldn’t make or break that decision.
If it does, maybe it wasn’t the right call to begin with. Maybe you are better off renting than buying a home.
The point here is that an extra $60-100 a month isn’t a lot of money in the grand scheme of things when we’re dealing with thousands of dollars.
That’s basically a 2.5% increase in the monthly outlay, which is pretty insignificant.
But I do understand that seeing mortgage rates rise again could be a psychological hit. And when you’re struggling with all the other expenses, it can push people over the edge.
Still, if you’re in the market to buy a home and can’t absorb an increase of a quarter to a half point, that might indicate it’s not the right move.
Read on: Mortgage Predictions in 2025
