Interest Rates and Your Pocket
What'sa mortgage anyway?
Imagineyou're in a candy store. Eyeing the largest chocolate bar you have ever seen.But your allowance won't cover it. So, you strike a deal with your parents.They'll buy it for you, and you'll pay them back bit by bit, with a littleextra for their kindness. That's what a mortgage is! It's an agreement whereyou borrow money to buy a house and pay it back over time, with a little extracalled "interest."
InterestRates: A Little Extra for Kindness
Whenyou're paying back your parents for the chocolate, they will ask for an extracandy from your collection each week. The extra candy is a thank you forlending you the money. It's called interest. The interest rate is how muchextra you pay the bank for lending you money.
InterestRates Changing Over Time
Let'ssay one day your parents ask for two extra candies each week instead of one.That's similar to when interest rates rise.
If youhave a fixed-rate mortgage (let's call this a "fixed-candy plan"),your payments won't change. You will keep giving your parents one candy perweek, even if they ask for two from your siblings.
RealNumbers: Making Sense of Mortgages in 2021 and 2023
Nowlet's switch from candy to real-world numbers. Imagine you borrowed $200,000from a bank in 2021 to buy a house. The interest rate was at a historic low of3%, and you chose a fixed-rate mortgage (a "fixed-candy plan"). Yourmonthly payment would be around $843 for 30 years.
Fastforward to 2023. Let's say you're buying the same house, and you need to borrowthe same amount - $200,000. But the interest rate has risen to 7%. With afixed-rate mortgage, your monthly payment would now be around $1,331 for 30years.
That'sa significant increase! Your monthly payment is almost $500 more permonth!
Wrap-Up:Planning for your Future Candy (or House!)
Interestrates can change, and when they do, it can make your mortgage payments moreexpensive.
Choosinga mortgage is like choosing candy. You should consider what you can afford andget help from the grown-ups who know a lot about this.
Understandinghow interest rates work and how they can change your mortgage payments is a bigpart of choosing the right mortgage. So, remember these lessons when you'reready to trade in your candy for a real house. Happy house hunting!