With mortgage rates over 6.50% these days, the average home buyer today is paying more in interest than the purchase price.
For example, a $400,000 home with 20% down and an interest rate of 6.5% equals $408,000 in total interest over 30 years.
And that’s if you put down 20%. Most home buyers don’t put down anywhere near 20%.
For these buyers, the numbers are even worse, something highlighted in a recent report from Best Interest Financial and Clever Real Estate.
While monthly payments may still be the focus, it’s still another tough pill to swallow for today’s would-be home buyer.
Paying More Interest Than Home Costs?
Best Interest Financial and Clever Real Estate came up with this interesting little graphic that shows the average house price can cost more in interest over 30 years than the purchase price.
The reason is simple; Loan rates are much higher today than in the past.
So a $403,200 home with a 20% down payment and a 6.53% 30-year fixed rate will set you back $413,700 in interest.
It may seem hard to believe since the interest rate is as low as 6.53%, but that’s how mortgage interest works.
Because it is charged over such a long period of time, and the outstanding balance is so large for most of that time, you pay a ton of interest over thirty years.
With a 20% down payment, the total interest actually exceeds the value of the home if your 30-year mortgage rate is above 6.4%.
Currently, mortgage rates are close to 6.7% so interest costs are higher than this.
To make matters worse, the average home buyer may put down as little as 3% (what Fannie Mae and Freddie Mac allow as the minimum).
In this case, the interest rate of 5.45% is high enough for the total interest to equal the purchase price.
As noted, most people only focus on their monthly payment and what they can afford, not what they will pay in interest over the life of the loan.
In addition, most will not keep the loan for the full term for one reason or another, whether it is selling early, refinancing, or prepaying.
The takeaway is that the lower the down payment, the lower the rate required for interest to exceed the cost of the home.
For example, if you’re not putting anything down to buy a home, a mortgage rate as low as 5.30% means the interest is more than the purchase price.
Whether that is important to you is another question.
What You Can Do to Lower Your Total Loan Interest
If you’re concerned that you’ll pay more in interest than you paid for your home, there are options.
The good thing about a mortgage is that you are usually allowed to prepay it as you see fit without penalty.
So if you want to pay an extra $250 a month, you can. That will reduce interest costs significantly.
For example, let’s use a $400,000 purchase price with a 20% down payment and a 30-year fixed rate of 6.75%.
The total interest is just over $427,000 over the full 30 years, assuming you keep the loan off.
Alternatively, if you pay an extra $250 each month the total interest drops to $296,623.
You no longer pay more interest than the cost of the home. Wow!
You will also pay off the loan about eight years earlier. Good.
The point here is that you have options with mortgages and you’re not stuck with just the “minimum payment”.
If you have the ability, you can pay more money whenever you want and reduce those interest charges.
Using the $250 extra example, you get an average interest rate of about 4.97%.
That means a 30-year mortgage set at 4.97% will yield almost exactly the same interest rate.
Read on: Try my early mortgage payment calculator to get your situation started.
Before creating this site, I worked as an account manager for a real estate broker in Los Angeles. My experiences in the early 2000s inspired me to start writing about mortgages 20 years ago to help prospective (and current) home buyers better navigate the mortgage process. Follow me on X for the hottest.
