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This blog post is part of a series, exploring the effect of politics on the housing market. Interest rates have a profound effect on home affordability, and election outcomes often influence these rates. Currently, mortgage interest rates stand at 6%, compared to 3% in 2016. This difference can add up significantly, increasing the monthly cost of a mortgage and limiting buying power.
The Difference in Mortgage Payments
Let’s break down the impact of rising interest rates on two different mortgage amounts: $450,000 and $1 million. Here's how the monthly payments change between 3% and 6% interest rates on a 30-year fixed-rate mortgage:
Mortgage Amount | At 3% Interest | At 6% Interest | Monthly Increase |
$450,000 | $1,898 | $2,697 | $799 |
$1,000,000 | $4,216 | $5,995 | $1,779 |
For a $450,000 mortgage, the monthly payment jumps by $799, and for a $1 million mortgage, it increases by $1,779. Over the life of the loan, this means tens or even hundreds of thousands of dollars more in interest.
Election Outcomes and the Federal Reserve
Elections can indirectly influence Federal Reserve policies, which control interest rates. Changes in the political landscape can lead to shifts in economic priorities, such as efforts to stimulate the economy with lower rates or attempts to combat inflation by raising rates. These decisions directly impact home affordability for millions of Americans.
Why Interest Rates Matter to Homebuyers
The difference between a 3% and 6% interest rate can significantly change what homebuyers can afford. As interest rates rise, homebuyers either need to lower their budget or be prepared for higher monthly payments.
For instance, at 3%, buyers could afford to borrow more, making homes in desirable neighborhoods or larger properties more accessible. With rates now at 6%, many buyers are finding they need to reduce their expectations, opt for smaller homes, or face much higher monthly payments.
Looking Forward
As the 2024 election approaches, homebuyers, sellers, and real estate professionals are paying close attention to how the political climate might affect borrowing costs. The outcome could lead to shifts in Federal Reserve policy, impacting home prices and mortgage rates.
Candidates’ positions on economic policies will be crucial in determining whether rates continue to rise, remain stable, or fall. Whether you're buying or selling a home, the next election could have a direct impact on your financial decisions.
Here’s an expanded table showing the average mortgage interest rates from 2016 to 2024, the monthly payment on a $500,000 mortgage, and the difference in monthly payments compared to 2024:
Year | Average Interest Rate (30-Year Fixed) | Monthly Payment on $500,000 Mortgage | Difference vs. 2024 |
2016 | 3.65% | $2,283 | - $715 |
2017 | 3.99% | $2,387 | - $611 |
2018 | 4.54% | $2,550 | - $448 |
2019 | 3.94% | $2,369 | - $629 |
2020 | 3.11% | $2,137 | - $861 |
2021 | 2.96% | $2,100 | - $898 |
2022 | 5.34% | $2,788 | - $210 |
2023 | 6.50% | $3,160 | + $162 |
2024* | 6.00% (estimate, subject to change) | $2,998 | Baseline |
Key Insights:
The difference column shows how much more or less a homeowner would pay in 2024 compared to each previous year.
In 2021, at the historically low interest rate of 2.96%, a homeowner with a $500,000 mortgage would have paid $898 less per month than they would at the estimated 6.00% rate in 2024.
Conversely, 2023 saw higher rates at 6.50%, meaning the monthly payment was $162 more compared to the 6.00% rate forecasted for 2024.
This table demonstrates the significant impact of interest rate changes on monthly mortgage payments, with the jump from 3% to 6% adding hundreds of dollars to monthly costs.
Here’s a table illustrating how much home a household earning $6,000 per month before taxes can afford from 2016 to 2024, based on average interest rates for a 30-year fixed mortgage. This assumes that 28% of the household’s gross income is spent on the monthly mortgage payment (a common affordability benchmark), with no significant debt and excluding taxes and insurance.
The formula used:
Affordable monthly payment = $6,000 * 0.28 = $1,680.
Mortgage amount = Present Value of monthly payments using the mortgage formula at each year's interest rate.
Year | Average Interest Rate (30-Year Fixed) | Max Affordable Home Price | Difference in Home Price vs. 2024 |
2016 | 3.65% | $374,960 | + $82,208 |
2017 | 3.99% | $356,206 | + $63,454 |
2018 | 4.54% | $323,385 | + $30,633 |
2019 | 3.94% | $360,669 | + $67,917 |
2020 | 3.11% | $400,078 | + $107,326 |
2021 | 2.96% | $409,042 | + $116,290 |
2022 | 5.34% | $291,637 | - $1,115 |
2023 | 6.50% | $257,851 | - $34,901 |
2024* | 6.00% (estimate, subject to change) | $292,752 | Baseline |
Assumptions:
Monthly income: $6,000
Affordable monthly mortgage payment: 28% of income = $1,680
Calculations exclude property taxes, insurance, and other expenses.
The mortgage affordability formula uses a 30-year fixed-rate mortgage, calculating the maximum loan based on the prevailing interest rate each year.
Key Insights:
In 2021, at a low interest rate of 2.96%, a household could afford a home priced around $409,042, $116,290 more than what could be afforded in 2024 at 6.00%.
By 2023, when rates hit 6.50%, the maximum affordable home price dropped to $257,851, $34,901 less than in 2024.
The shift from 2020's historically low rates (3.11%) to 2024's estimated 6.00% represents a reduction in affordable home price by more than $107,000.
Send your friends to: www.PoliticsInRealEstate.com
Ready to move? Take advantage of our Full Market Value Cash offer - get your home's market value from our expert agents.
Disclaimer: This blog post is for informational purposes only and does not constitute financial, legal, or professional advice. Mortgage rates and housing market conditions can change rapidly, and individuals should consult with a licensed mortgage advisor, financial planner, or relevant professional to evaluate their specific circumstances before making any decisions related to home purchases or refinancing.
This is from our series ‘Politics and Real Estate’
50 U.S. states, ranked by affordability, property and state income tax, and population changes from 2016 - 2024
Are you deciding to keep your home based on the interest rate you have - which is low?