When I got my mortgage in 2020, the interest rate was only 2.15%. Fast forward to today, and the rate has skyrocketed to 6.9%. This drastic increase raises a crucial question: how much will my payment go up when I renew? Will my payment triple if the rate triples?
My Mortgage Scenario
In 2020, I took out a $450,000 mortgage with a variable 2.15% rate on a 4-year term and a 25-year amortization. My monthly payments were approximately $2,000. As I approach the end of my term, I should have about $393,000 left on my mortgage.
Renewal at a Higher Interest Rate
For my second term, I will be financing $393,000 at the new rate of 6.9%. This results in a new monthly payment of roughly $2,700, which is a significant increase but still less than what one might initially fear.
Payment Increase Breakdown
- Original Payment (2.15% interest): $2,000/month
- New Payment (6.9% interest): $2,700/month
- Increase in Payment: $700/month
- Percentage Increase: 35%
While a 35% increase is steep, it’s important to note that this is far better than the payment tripling.
Understanding the Math
A common misconception is that if the interest rate triples, the mortgage payment will triple as well. However, mortgage payments are not directly proportional to the interest rate due to the way they are calculated, considering both principal and interest components over the term of the loan.
Key Takeaways
- Rising Rates: Interest rates can have a significant impact on your mortgage payments, but the increase in payments is not directly proportional to the increase in rates.
- Renewal Planning: As you approach the end of your mortgage term, it’s crucial to plan for potential increases in your payments. Understanding the impact of rate changes can help you budget and prepare accordingly.
- Consult a Professional: If you’re facing a renewal at a higher rate, consulting with a mortgage professional can provide you with options to manage the increased payments, such as refinancing or adjusting your amortization period.
Conclusion
Although a jump from 2.15% to 6.9% is substantial, the increase in your monthly payments will not be as dramatic as the tripling of the interest rate might suggest. In my case, the payment went up by 35%, which, while significant, is manageable with proper planning.