# Doing The Math: 3% vs. 5% vs. 7%

Sometimes it's good to "show the math" when talking about the changing real estate market conditions, and what it means for home buyers. In an effort to be totally open and honest, here's a look at what 3% vs 5% vs 7% interest rates actually mean in terms of money spent or saved on your home purchase.

## How Do Interest Rates Affect Home Prices?

The average home price in the United States is about \$507,800. Obviously, this varies significantly by location. For simplicity's sake, let's assume you want to buy a house that costs \$500,000, and you have \$100,000 for your down payment. At 20%, \$100,000 should mean you don't need to pay private mortgage insurance (PMI).

You're borrowing \$400,000 to purchase the home. How much will interest rates affect the full amount you pay before you own the house?

7% Scenario

If you get a 30-year fixed-rate mortgage with a 7% interest rate, you can expect to spend \$958,035.59 plus the \$100,000 you used as a down payment. This amount does not include insurance, property tax, and other expenses.

That's right. Your \$500,000 house now costs nearly a million dollars. How does that happen? Over the years, you paid a total of \$558,035.59 in interest. You spent more money on interest than the actual property.

5% Scenario

In this scenario, everything stays the same, except you qualify for a 5% interest rate. You might not think that 2% seems like a lot. The numbers say otherwise.

With a 5% interest rate, you spend \$373,023.14 on interest and a total of \$773,023.14 buying the home. Lowering your interest rate by 2% saves you \$185,012.45 over 30 years.

3% Scenario

In today's real estate lending market, 3% is becoming increasingly unlikely as the Fed raises its interest rates. Still, we'll show you the math. At 3% over 30 years, you would pay \$207,109.81 in interest. The total purchase, not including your down payment, comes to \$607,109.81.

Compared to a 7% mortgage, you save nearly \$351,000. You save almost \$166,000 compared to the 5% mortgage.

## Don't Run Away!

Hopefully, this doesn't make you turn and run away from the real estate market as interest rates continue to creep upward. There are new reports predicting rates will mellow out in 2023. We shall see. But, there are other ways that you can help offset higher interest rates if you are looking to purchase sooner than later.

## Know What You Can Control

You can control some factors easier than others when you buy a home. For example, you can get a lower interest rate by saving money for a larger down payment and working to improve your credit rating.

You can also control how much money you pay toward your mortgage each month. As long as your lender doesn't charge an early repayment penalty, you could save a lot of money by making a small additional payment each month.

By contributing an extra \$100 per month toward your mortgage, you save:

• \$72,851.78 on a 7% mortgage
• \$41,552.74 on a 5% mortgage
• \$20,087.25 on a 3% mortgage

You will also repay your loan a couple of years earlier than scheduled. It feels really good to get out of debt and own your home outright!

## We're Here To Help

You're not in this thing alone. We have seen the market change drastically over the past few years, and we have helped buyers and sellers adapt accordingly. We are always happy to share our honest opinion about the market and we have great suggestions on lenders and financial planners whom you can consult as well. Don't hesitate to give us a call at 239.472.1950 or email [email protected]