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Higher Mortgage Rates and the Wealth Drag
Most understand that rising interest rates means higher monthly payments for new home buyers. That narrative has been all over the media.
Many may not realize that building equity as rates rise takes a lot longer. This is important to understand because home equity is often a large portion of individual wealth.
Consider an example of a $360k mortgage.
At a 2% interest rate, your monthly payment is $1330. Incredibly, your very first mortgage payment pays more towards principal than interest.
At a 7% interest rate, your monthly payment is $2395. It’ll take 242 payments until principal paid is greater than interest. For those keeping score, that’s just over 20 years!
Point is, rising rates doesn’t just affect the payment amount. Wealth creation is stalled dramatically.
I felt compelled to create a graphic on this. It’s a missing narrative out there.
The long term impact of higher interest rates is crazy when laid out in a format like this. Makes it easier to understand the implications. These cannot sustain and a lot of home owners will be feeling the pain.
I agree. There is a large impact. I would hope higher rates are temporary
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