How Do Mortgage Rates Affect My Monthly Mortgage Payments?

Mortgage rates are determined by a complex set of factors, both ones that pertain to the individual borrower, overall market, and economy. One of the primary factors playing into a mortgage interest rate is how risky the lender thinks a borrower is. This is determined by assessing their credit score and loan-to-value ratio (determined by how much of a down payment is placed). However, mortgage rates also fluctuate daily in response to inflation, job growth, home sales, and stock prices, making it essential for borrowers to explore their options to help find them the best mortgage rate for the new home and financial situation. Different lenders offer different interest rates as their tolerance for certain risks may vary and affect the interest rates they offer.
Modern mortgages came into play after the Great Depression, with changes in mortgage programs reducing the requirements of the down payment and increasing the amount that could be borrowed. Finding the best mortgage is important; if it is too high the borrower ends up paying more than necessary over the lifetime of the loan. If the borrower is unable to put down at least 20% of the sale price of the home, lenders typically require borrowers to pay an additional fee in the form of private mortgage insurance (PMI) to protect the lender from risky buyers. 
Monthly mortgage payments can be calculated using the formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1]. In this formula, M is the monthly mortgage payment, P is the principal or balance of the loan, i is the annual interest rate divided by 12, and n is the number of months in the loan term.

As interest rates increase, it will cause the monthly mortgage payments to increase accordingly. At the beginning of a mortgage, payments primarily go towards paying down the interest rate on the loan, while later payments are put towards paying the principal and building home equity. Just an increase of .25% on the annual interest can result in more than an additional $4,000 in mortgage payments every year. It may be helpful for homeowners to evaluate the amortization schedule of their loan to understand the exact amount of interest and principal being paid with each monthly payment. Over time, higher interest rates result in more money being paid on the loan balance.
However, additional fees play into account in each monthly payment. Property taxes, homeowner’s insurance, and homeowners association fees are expenses that may need to be considered monthly as well. 
Throughout the lifetime of a mortgage, even a fixed-rate mortgage can experience changes. Monthly payments may increase if property taxes or homeowners insurance increases. Property taxes are based on the home’s value, so if the property has appreciated the taxes will increase. If less than 20% was paid as a down payment on the home, after the homeowner reaches 20% equity, PMI can be removed from the loan and monthly payments reduced. At 20%, the homeowner may need to reach out to their loan servicer to request PMI to be removed, while at 22% it is removed automatically. For mortgages that are not fixed-rate, any increase will result in higher monthly mortgage payments, or the reverse if the interest decreases. 
Homeowners also have the option to refinance their homes to get a better interest rate. This is especially helpful for borrowers who bought their homes when interest rates were high but have now decreased. It is also helpful for homeowners who may not have had a great credit profile when they bought their home, but have since improved it and qualify for better interest rates. Refinancing can also extend or reduce loan terms, which will affect the total monthly payments as well. 
Mortgage interest rates are complex and evolve daily in response to both individual and economic factors. Getting the best interest rates is often essential to the home buying journey, with high-interest rates resulting in more money spent over the life of the loan. Homeowners need to understand how their interest rates affect their monthly payments so they can find the best option to work within their budget, ensuring that they have trouble with payments and fall behind. For borrowers with high-interest rates, refinancing is an option to help reduce monthly payments.