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How Much Money is a Quarter Point of Interest?

With all this debate about a quarter point interest rate increase, I thought I would look at what it really means for the average consumer. The first thing that most of us think of when we talk about interest rates is a mortgage. Let's say we have a $200,000 mortgage at 4% , and then let's compare that to a $200,000 mortgage at 4.25%. This is a 30 year fixed mortgage, and we are not taking into account taxes, insurance, down payments, PMI, etc... Let's just look at the loan itself.

At 4.0%, the monthly payment on that mortgage is $954.83. At 4.25%, the monthly payment on that mortgage is $983.88.  The difference is $29.05 per month in extra interest, or an increase of 3.04%. Ironically, this is about the same as a monthly payment on your new iPhone 6s that you have pre-ordered.  It is not a ton of money, but it will make a small dent in your monthly spending cash. Over 30 years, this amounts to $10,457.71 in extra dollars paid toward your house. The total principal plus interest at 4.0% is $343,739.01, and the total principal and interest at 4.25% is $354,196.72.

However, not everyone purchases a house in their lifetime.  To use an example that is more relevant to everyone, I will look at a car loan. Let's use the example of a $20,000 car loan over 5 years (60 motnths). Again, I won't consider taxes, down payments, title, fees, etc… in this example, just a the $20k loan.

If this loan had an interest rate of 6%, your monthly payment would be $386.66.  If that interest rate rose to 6.25%, your payment would be $388.99.  That is a difference of $2.33 per month! Over the life of your 5 year car loan, you would pay an extra $139.80 to purchase that car.  You spend more than that on your daily double espresso at Starbucks, and this is only a monthly payment.  

As you can see, chances are that a quarter point rate hike is most likely not going to change your spending or financing habits dramatically.  If we get into a series of rate hikes and rates start climbing by 1.0% or more, then we may see some drastic changes in consumer behavior.  Until then, enjoy borrowing cheap money and lock your debt into fixed rates!