"Over 30 years, the typical home buyer pays $736,260 back to the lender on a $322,560 loan for the median-priced home, more than twice what they originally borrowed," says a study, which was published on Jun. 9 by Clever Real Estate and a mortgage lender.
Paying more in interest than the home cost isn't unusual. Indeed, the last time that was the case was last September. However, it's a sign that mortgage rates are heading back higher on inflation fears caused by the conflict in the Middle East.
Right now, a home buyer locking a rate today would, on average, pay 102.6% of the property's purchase price over the lifetime of the loan. And that's for those with 20% down payments.
One Dream and One Nightmare
The study played with a couple of scenarios. Let's dream that today's average mortgage rate were the same as the annual average rate in 2021, 2.96%.
The homeowner would pay $692 less each month than with the current rate. That's a cool quarter of a million dollars ($249,188) saving over the lifetime of a 30-year fixed-rate mortgage (FRM).
But how about the nightmare scenario: a one-percentage-point rise in mortgage rates to an average 7.53%? Sorry, but we reckon there's a real chance of that happening unless the Middle East conflict is settled and the inflation rate drops back to pre-war levels quickly.
Well, that one-percentage-point increase would add $78,066 to the average interest bill over the lifetime of the loan for someone with a 20% down payment. Those putting down 3.5% of the purchase price on an FHA loan would pay $85,326 more than they currently would.
What's the takeaway from this? Nobody can predict future mortgage rates, but those keen to become homeowners in 2026 or 2027 might want to act quickly in case rates worsen.
Big Savings with a 15-Year Loan
Most people can't afford a 15-year mortgage: On average, it currently adds $654 to the monthly payment.
But those who can afford one can make enormous savings on their total interest costs. How come?
Well, to start with, 15-year borrowers rarely get into arrears or default, so they get a lower mortgage rate, maybe 5.87% at the moment. Then, one's paying interest for only half the standard period, 15 years instead of 30 years.
When one's borrowing six-figure sums, that makes a huge difference. And the study calculates a saving of $250,378 right now, compared with a 30-year loan.
Geography Makes an Enormous Difference
We frequently say that where one lives makes a huge difference to housing costs. So, it's perhaps surprising that the study found the same 102.6% ratio of interest to purchase price in all the metros it examined.
But, of course, there are vast variations in home prices in those different metros. So the dollar amount of the interest payable changes, even when the ratio stays the same.
According to the study, the 10 metros where the interest bill is highest are:
- San Jose, CA ($1,718,620)
- San Francisco, CA ($1,231,250)
- Los Angeles, CA ($1,077,344)
- Honolulu, HI ($1,041,843)
- San Diego, CA ($992,695)
- Oxnard, CA ($941,650)
- Bridgeport, CT ($795,182)
- Seattle, WA ($749,010)
- New York, NY ($702,839)
- Boston, MA ($682,318)
Wow! California is home to four of the five most expensive metros.
Here are the 10 metros where homeowners pay the smallest dollar amounts in mortgage interest:
- Toledo, OH ($163,654)
- Akron, OH ($184,688)
- Scranton, PA ($207,517)
- Cleveland, OH ($220,496)
- Pittsburgh, PA ($220,599)
- Dayton, OH ($221,112)
- Syracuse, NY ($225,729)
- McAllen, TX ($234,451)
- Little Rock, AR ($235,990)
- Rochester, NY ($241,120)
So, Ohio's looking attractive, as is Scranton and Pittsburgh, PA.
Conclusions
Only cash buyers can escape mortgage interest. But things aren't as bad as they may feel.
For most weeks between 1978 and 1990, mortgage rates were above 10% for a 30-year FRM, according to Freddie Mac's archives. Often, they were way above 10%, including 18.63% in October 1981.
They reached those heights because inflation was allowed to run riot in the late 1970s and early 1980s. So, we must hope that the Federal Reserve and U.S. Treasury do a better job of managing the current bout of inflation.
If they don't, mortgage rates in the mid-six percent range may become a dream scenario.
