Mortgage Interest Rates & Mortgage Rate Calculator Basics

Hard to believe, but the mortgage crisis could be much worse.  One primary factor that has kept the crisis from escalating even further is that home loan interest rates have remained low due to actions by the Fed. If rates were higher, that would cause buying to slow down as the combination of falling home prices and high mortgage rates would keep more people out of the market.  However, a low rate is not guaranteed for the long run (we are currently at historical lows). 

For homeowners holding an adjustable rate mortgage (ARM) home loan, an increase in mortgage rates means higher mortgage payments.  This on top of the pain of higher food and energy prices - and just about everything else makes life more difficult. For would-be home buyers, an increase in interest rates could make a home purchase unobtainable. So how do rises in interest rates affect your monthly mortgage payment?

A .25% Change in Interest Can Make a Big Difference in Mortgage Payments

Obviously, the affect of an increase or decrease in mortgage interest rates depends upon the amount of the loan. When you take your mortgage rate calculator
 and look at a $300,000 thirty year fixed rate mortgage of 6%, you find that your payment for principle and interest is $1,799 per month. An increase in interest to 6.25%, makes the mortgage payment on the same loan go to $1,847 which is an additional $48 dollars per month. On a $600,000 loan amount the mortgage calculator shows a big difference in monthly mortgage expense:

    $600,000 @ 6%      = $3,597
    $600,000 @ 6.25% = $3,694

That addition of nearly $100 per month can be huge for those struggling to make ends meet or trying to qualify for a new home loan--it takes about a $300 per month income increase to offset a $100 increase in monthly expenses for qualifying purposes.  Those whose financial plans include a refinance may have to add a backup strategy to avoid becoming "house poor" in the future if adjustable rates rise and they can't qualify for a fixed rate loan. 

And for those who are currently in an interest-only loan (a very popular mortgage during the housing boom) if you want to refinance into a fixed rate traditional loan, be prepared for your monthly payment to go up since you will now be paying principal in addition to interest.  Depending on your situation, it may be better to bite the bullet and refinance your mortgage now, before you are forced to start paying principal when your interest only payment period is up.

Protect Your Mortgage and Your Future

Recently the interest rate on many adjustable rate mortgages actually went down which lowered homeowner's monthly mortgage payments. This is because the Federal Reserve lowered interest rates and adjustable rates often shadow Fed rate changes pretty closely. Interest rates, both short and long-term are expected to move up given current economic expectations.

If you do want an adjustable rate mortgage loan, look at one with a stable index such as the CMT or the COSI and one that will not adjust for 5 years or more to give you time to maneuver into a fixed rate mortgage if interest rates and market conditions are good. Also, you may want to consider refinancing your adjustable rate mortgage into a fixed rate note before interest rates move higher.

For those who have jumbo mortgages over $417,000, now may be the time to refinance as the conforming loan limits have been raised and will stay in effect until the end of this year. Remember, before you do anything, follow the FDIC advice posted at their website:   “Different mortgage lenders may quote you different prices, so you should contact several mortgage lenders to make sure you’re getting the best price.”  You can start by contacting lenders in our database for mortgage rates and quotes here.

Posted By :
Sheryl Landrum is a Loan Officer in San Diego, California and a freelance writer specializing in mortgage issues.

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