Mortgage Rate Analysis

December 28, 2023

There has been much discussion lately as to mortgage rates and prices of homes.

Prices of homes have not gone down as mortgage interest rates have increased from 3% to 7% . Why? There is a simple explanation, inventory of homes for sale have gone down and thus, based upon simple “supply and demand,” prices have remained about the same.

Why has the inventory of homes gone down? Simple, if you were fortunate to buy when interest rates where in the 3% range, you won’t want to sell when they are at 7% because you won’t be able to afford to purchase an equivalent or more expensive home. As a result, supply goes down because there are not as many homeowners wanting to sell and go from a 3% mortgage to a 7% mortgage . Demand remains but supply is reduced, thus prices remain high.

As an example, a $400,000 mortgage for 30 years, at a rate of 3%, results in a monthly mortgage payment of $1,686.42 for principal and interest.

The same $400,000 mortgage for 30 years, at a rate of 7%, results in a monthly mortgage payment of $2,661.21 for principal and interest. An increase of $974.79 monthly or $11,697.48 annually. That is a large “hiccup.”

In order to keep your monthly payment the same with a 7% mortgage as a 3% mortgage, you can only have a mortgage of $250,000. A $250,000 . mortgage at 7% for 30 years results in a monthly payment of $1,663.26. for principal and interest.

The $400,000. Mortgage, at 3%, assumes that the price of the home is $500,000. and that you put 20% down or $100,000. The same holds true at 7%.

In order to keep your monthly payment the same as that of a $400,000. loan at 3%, the purchase price of a home , with 20% down , can only amount to $312,500. The 20% down is $62,500. and the carried mortgage amounts to $250,000. At 7%, the monthly mortgage for principal and interest amounts to the $1,663.26.

As a result, those folks who were lucky to purchase a home at a 3% interest rate are not going to sell anytime soon and therefore supply goes down while demand remains and therefore prices stay high.

Good Luck!

Jess Sweely