Mortgage Market Milestone: Lifetime Interest Costs Cross 100% of Home Values | Mortgages
Key Takeaways
- At current mortgage rates of 6.5%, homebuyers can expect to pay more in lifetime interest than their home’s purchase price.
- In some expensive markets, interest may exceed $1 million over the life of a 30-year mortgage.
- Homebuyers can save money by shopping for better rates, selecting a 15-year mortgage and making extra payments.
- Some finance experts suggest homebuyers will come out ahead financially if they invest extra money rather than use it to pay off their mortgage early.
Someone buying a median-priced home today will pay back more than double what they borrow, according to a recent analysis by Best Interest Financial and Clever Real Estate. That’s even with a 20% down payment.
At a 6.53% interest rate, a homeowner borrowing $322,560 will pay $413,700 in interest over the course of a 30-year mortgage – an amount equal to 102.6% of the median purchase price of $403,200. This isn’t the first time total mortgage interest has exceeded the purchase price of a home, but it is the first time it’s done so since last year.
“It’s really all about where the interest rates are right now,” according to Craig Garcia, president of Capital Partners Mortgage Services in Weston, Florida.
Once rates exceed 5.25%, Garcia says, homebuyers can expect to pay more in lifetime interest than the amount they borrowed – that is, the purchase price minus the down payment. At 6.5%, lifetime interest will exceed the purchase price over the course of a 30-year loan, even with a 20% down payment.
Fortunately for homebuyers, there are ways to reduce mortgage interest payments.
The Financial Reality of the 6.5% vs. 3% Mortgage Market
The mortgage landscape was significantly different for homebuyers just a few years ago. In 2021, the average interest rate was only 2.96%. Buying the same house with the same down payment at that rate would save someone $249,188 over the life of the loan as compared with today’s rates.
| Interest Rate | 6.53% | 2.96% |
| Monthly Payment (Principal + Interest) | $2,045 | $1,353 |
| Total Interest | $413,700 | $164,512 |
Making a smaller down payment could mean you pay significantly more interest. For instance, putting down 3.5%, as allowed by FHA loans, instead of 20% will result in an additional $85,326 in interest charges. What’s more, for every 1% mortgage rates increase, lifetime interest will increase by $78,066 for a median-priced home.
That doesn’t necessarily mean you should wait for rates to come down before buying, though.
“We’re going back to historical norms,” says Jayson Hardie, CEO of Homestead Financial Mortgage, which operates in 16 states. He doesn’t expect that we will see 3% interest rates anytime soon, and in the meantime, housing prices may continue to climb. “Would you rather pay $300,000 at 7% or $350,000 when the rates are 6.5%?” he asks.
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Where Borrowers Are Hitting the Million-Dollar Interest Mark
For a 30-year mortgage at today’s rates, everyone will pay more than the purchase price in interest over the course of the loan. “No matter how large your mortgage is, you’ll pay more,” says Bonnie Gurry, CEO of GreenPortfolio, a nationwide advisor matching platform that connects investors with climate-conscious wealth managers.
Still, the larger your mortgage, the more you’ll pay in interest. Carolyn Morganbesser, assistant vice president of mortgage originations at Affinity Federal Credit Union in New York, ran the numbers for a $500,000 mortgage with $25,000 down. Using a current rate of 6.625% – 7.040% APR – for someone with a FICO credit score of 740 to 750, the interest on that loan would total $619,932 after 30 years.
In some cities with high housing prices, total interest payments can top $1 million. According to Best Interest Financial and Clever Real Estate, these are the four metro areas where buyers will spend seven figures in lifetime interest:
- San Jose, California: $1,718,620
- San Francisco: $1,231,250
- Los Angeles: $1,077,344
- Honolulu $1,041,843
How to Save Money on Mortgage Interest
The high cost of interest may be enough to make some people think twice about purchasing a house, but Garcia says not to be deterred.
“It’s not like you wasted all that money,” he says.
A mortgage allows you to purchase property that builds equity. Also, thanks to inflation, incomes are likely to increase over time while a fixed-rate mortgage payment’s principal and interest will remain the same, meaning it will make up a smaller portion of your household budget over time.
Still, you don’t want to spend more than you have to. Consider these five money-saving strategies.
1. Pivot to a 15-Year Fixed Mortgage
Rates for 15-year mortgages are typically lower than those of 30-year mortgages. Plus, you’ll be paying interest for only half the time.
“If you can handle paying back the loan in 15 years or 20 years, it does give you a decent break,” Garcia says.
A homeowner with a 15-year mortgage at a 5.87% rate will save $250,378 in lifetime interest, according to the Best Interest Financial and Clever Real Estate report. The caveat is that, to get those savings, your monthly payment will increase by about $654.
2. Implement a Refinance Strategy
If you can’t afford the higher payments that come with a 15-year mortgage, you may be able to save money by refinancing to a lower rate or a shorter term after you’ve owned the home for a few years.
“Most people don’t keep it for 30 years,” according to Morganbesser. “Most mortgages pay off between years seven and 10.”
After a few years of homeownership, you may find your income has grown to the point where a 15-year mortgage is affordable. Or interest rates may have dropped, but be realistic about what the future holds.
“Don’t make the mistake of thinking interest rates are going to go to the COVID (era) levels again,” Hardie says.
3. Shop for Lower Rates
If you are willing to devote time and effort to shopping for a mortgage and negotiating with a lender, you could pay significantly less than the going rate. That’s how Gurry was able to drop her mortgage rate from 6.2% to 4.875%. She used the following strategy to find the best deal possible.
- Look for relationship pricing. Some lenders offer relationship pricing that can be 0.25 to 1 percentage point lower for existing customers, particularly those with large account balances. Not every bank advertises its relationship pricing, Gurry says, so you may need to ask. If you don’t have a large enough balance to qualify, Gurry notes that it is relatively easy to move an IRA to a new provider.
- Ask for a rate match. As Gurry collected offers, she asked her preferred lenders to match the lowest rate she received elsewhere.
- Consider rate lock policies. The ability to lock in a rate can save money, but it’s even better if a lender will allow you to lock a rate more than once. Gurry says there may be a fee for additional locks, but it could be worth it if it keeps your rate low. In her case, when the Iran war broke out over a weekend, she called her lender first thing on Monday morning to lock her rate.
- Buy points. Gurry and her husband did buy one point as well. Purchasing mortgage points is a way to reduce interest by paying a fee. In Gurry’s case, it made sense because her household had access to a workplace benefit that reimbursed them for that fee.
“Everything is very opaque. It’s very frustrating,” Gurry says. Information wasn’t always readily available, and she had to call a mortgage broker every morning for the latest rates to see if she wanted to lock her rate. While time-consuming, it paid off in the end.
4. Make Extra Payments
Making extra payments is an easy way to save money on interest and accelerate your loan’s payoff schedule.
“One extra payment per year can drop seven years off the life of the loan,” Morganbesser says.
An easy way to make this payment is to use a tax refund or annual bonus, if you receive one. However, be sure that any additional money is earmarked for the loan principal.
5. Don’t Stress, Invest
Not everyone thinks people should be focused on paying as little as possible in mortgage interest.
“It’s about opportunity cost,” Hardie says. Rather than spending extra on a mortgage, you could invest that money in an investment vehicle such as an S&P 500 fund, he suggests. “You can either elect to save 6.5% (in interest) or you can elect to earn 10%-11% (in investments).”
Of course, all investments come with risks. While the S&P 500 has gained an average of 10% per year since its inception, actual returns vary from year-to-year. In 2022, for example, it lost about 20%.
“You have to be prepared to play the long game,” Hardie says. For those who are willing to do that, investments will compound every year, which can further amplify gains.
It’s not the right strategy for everyone, though. Some people sleep better in a house that’s paid off. “That peace of mind sometimes outweighs the investment side,” Morganbesser says.
