How much difference does 1% make?

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Real Estate

The 1% Rate Difference on Monthly Mortgage Payments
By Jennifer Warner

ORLANDO, Fla. – Interest rate volatility on the 30-year fixed-rate mortgage has dramatically reshaped the housing industry since the onset of the Covid pandemic.

Prior to this, interest rates hovered in the 3-5% range in the years coming out of the Great Recession – rates much lower than what was typical in the 1990’s and early 2000’s.

The important part of this long period of stability is that rates were likely in the same range when you went to sell as they were when you bought 5-7 years earlier, the typical tenure for a homeowner in America. This allowed for a nice, fluid market in which the monthly payment amount had more to do with changes in the principal component of the loan than dramatic changes in interest rates.

We’ve discussed the impact of this time extensively in the Florida Realtors News in the past, both as it was happening and a little more recently looking in the rearview as rates started climbing back up with a vengeance in mid-2022. The most significant impact of the rapid change in rates is that the lending environment looks starkly different for those who bought or refinanced in 2020-2022 versus today. The result has been people who are reluctant to relinquish lower rates while concurrently running into a seismic upward shift in prices.

While all these headline numbers matter to real estate professionals and market analysts, what matters to every potential homeowner is the monthly payment. It is often the largest of all the expenses that go on that side of the household ledger and dictates how much is left for the rest of the expenses that make for a life.

It’s easy to forget that a large swing in interest rates on a mortgage can translate into hundreds of dollars more (or less) depending on what they can lock in at the time of the transaction.

It also matters what that monthly payment is in terms of whether a lender will even issue a mortgage, as it may fall outside their stringent debt-to-income ratios. What may have worked when interest rates were around 4% may suddenly not work after rates shot up. Rate hikes rarely could kill a deal before, as they tended to be a few basis points one way or the other from pre-qualification to close. However, over the last 18 months or so, deals died on the vine as the pace of increases was uniquely fast.