Just How much Do Interest Rates Affect Monthly Payments? Time Travel to Find out

In May of 1981, the interest rate on a home mortgage hit 20.5%. This was—and still is—the highest it ever climbed, but it hovered in the 20% range from 1980 to 1982, when it began a slow and anything but steady descent.  (For a complete history of American mortgage interest rates, see Mortgage-X Mortgage Information Service’s table here.)  Today, the mortgage rate in this country has fallen under 4% for a 30-year fixed mortgage.

Although we are well aware that many Americans are struggling to qualify for loans these days, it’s worth examining how interest rates effect our monthly payments.  To showcase how dramatic the effect, we’ll go retro:  hop in the time machine with us and we’ll travel to 1980, buy a house (hypothetically); then we’ll travel back to 2011, and buy the same house at 2011 prices— after we’re done traveling, we can see which home actually costs more.

The Set Up:

For this exercise, we’ll invent a home that sells for $240,000 in 1980. The interest rate then was 20%, so here’s what your monthly payment would be (keeping in mind property tax and insurance rates are extreme guesses given this house doesn’t actually exist). We ran these numbers using ZipRealty’s monthly payment calculator.

And here’s your monthly:

 That’s $3,614 a month for as long as you stay at 20%.

Now fast forward to 2011. We take the same house, and double its value to account for inflation. We’re also doubling property tax and insurance, just to be fair. Only now, we enter 3.75% interest, reflection today’s low rates.

What’s this look like monthly?


Quite a bit less, and remember, in 1980 the monthly of over $3,000 would have felt like more (we have to account for inflation there too).

Back to Reality

Indeed, today’s interest rates are tantalizing to homebuyers. But how to get the bank to loan you the money? Tune in Wednesday for some ideas on creative ways to solve your home loan problems.