Rising Interest Rates Send Mortgage Payments Climbing Twice as Fast as Home Values

Home buyers today would have to spend nearly $1,400 more per year on their mortgage than they would have a year ago, as rates have risen rapidly since the beginning of 2018, said Zillow, Seattle.

The Zillow analysis found buyers’ monthly housing costs are growing rapidly as mortgage rates have risen significantly since the beginning of the year. Higher rates are responsible for nearly two-thirds of the increase in buyers’ monthly mortgage payments compared with what those costs would have been a year ago, had home values remained constant at their current level.

The analysis said monthly mortgage payments for the typical home are 15.4 percent higher than they were in August 2017. The median home value is 6.5 percent higher over the past year. For someone buying the median U.S. home, their monthly mortgage payments are $118 higher, or $1,416 each year. These higher mortgage payments reflect the combination of increased home values as well as the higher interest rates for buyers.

Since the beginning of the year, mortgage rates have climbed from historic lows for much of the past decade. The Mortgage Bankers Association said the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level last week since February 2011, 5.10 percent, from 5.05 percent, with points increasing to 0.55 from 0.51 (including origination fee) for 80 percent loan-to-value ratio loans. At the beginning of the year, the 30-year fixed rate was 4.25 percent.

The Federal Reserve has raised the target federal funds rate three times so far this year, with as many as five more expected through the end of 2019. Zillow said a 1 percentage point increase to the current rate translates to nearly $1,200 more per year in mortgage payments for the typical U.S. home at its current value, even if home prices stayed the same.

“We’re finally starting to see typical patterns asserting themselves in the housing market, and conditions are returning to more of what we would expect in a normal economy,” said Zillow Senior Economist Aaron Terrazas. “Home buyers and sellers have become accustomed to low rates, and there will be a bit of an adjustment period as the market adapts. Looking ahead, the impact of higher rates may slow the pace of home value growth, particularly in the nation’s priciest markets. Buyers will face higher financing costs, but also could benefit from somewhat less frenetic competition.”

Zillow noted as mortgage rates have risen, home value appreciation has slowed somewhat, growing 6.5 percent annually in August after peaking at 8.2 percent in March 2018. “These slower price gains may be seen as an advantage for buyers, but the rapid increase in mortgage rates work against the benefits of a slightly cooler market, as the mortgage payments themselves continue to climb,” Terrazas said.

Buyers in San Jose, who also face the highest median home values, have also seen the biggest impact on their monthly mortgage costs from rising rates. Monthly mortgage payments on the typical home are $1,300 higher than they would have been a year ago, meaning buyers are spending about $15,500 more every year, nearly 10 times larger than the nationwide increase.