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Affording that house - monthly

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THE SCENARIO Last time, I talked a bit about rising interest rates and their affect on the size of a loan a person can afford. Today, I'd like to take a look at the same question, but from a different angle. So this time, we're going to assume that I want to buy a $500,000 house, and I have 20% ($100,000) to put down when I complete the purchase. I'm going to assume that I can get a 30-year, fully-amortizing loan for the remaining $400,000 balance. The question: How much higher would my monthly payment be if I were to borrow the money at 5.25% instead of 4.125%?

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THE SOLUTION This question is relatively straightforward: figure out the monthly payment at two different interest rates, and compare the two numbers. First things first, make sure the calculator is using 12 Payments per Year. Loan 1: Borrowing at 4.125% N: 360 (I'm getting a 30-year loan) I/YR: 4.125 (I'm borrowing the money at 4.125%) PV: 400,000 (I'm borrowing $400,000) PMT: (This is what I'm trying to find) FV: 0 (The loan amortizes fully)

If I borrow the money at 4.125%, my monthly payment will be $1,938.60.

Loan 2: Borrowing at 5.25% N: 360 (I'm getting a 30-year loan) I/YR: 5.25 (I'm borrowing the money at 5.25%) PV: 400,000 (I'm borrowing $400,000) PMT: (This is what I'm trying to find) FV: 0 (The loan amortizes fully)

If I borrow the money at 5.25%, my monthly payment will be $2,208.81.

The Answer

If I borrow the money at 5.25%, my monthly payment will be $2,208.81 - $1,938.60 = $270.21 higher than if I borrow at 4.125%. Over the life of the loan, the higher interest rate costs me an extra 360 x $270.21 = $97,275.60

Though lenders use 'rising rates' as an incentive in their advertising, they do have a point that if you can borrow at lower rates rather than higher rates, you'll pay less, both from a month-to-month perspective and over the life of the loan. Of those two, the month-to-month number is much more significant to me, personally - month-to-month money has a greater impact on my quality of life than a larger sum spread over many years. That's one reason why I personally tend to prefer longer loans to shorter loans when I borrow money - I pay more over the life of the loan, but each month is less painful.

What do you think? Do you think it's worth making borrowing a priority before rates rise? Or is there some benefit to borrowing at higher rates that I'm not seeing? What are your thoughts about shorter loans vs longer loans? Let us know in the comments!