• Current rates on a conventional, 30-year mortgage with a 20% down payment are at their lowest since at least 1971, helping to keep monthly mortgage payments exceptionally low — and affordability high — even as bottom-line prices keep rising.
• Assuming mortgage interest rates hold at their current average level of 2.68% and home values grow in line with expectations, the monthly mortgage payment on the typical U.S. home would rise to $952/month by December 2021, up from $862 in December 2020.

Mortgage interest rates fell to historic lows in 2020 and may yet fall farther, helping stretch budgets for those in a position to afford a mortgage. But if home values grow largely as expected this year, rates on most conventional loans would need to fall another roughly 60 basis points — to around 2% — in order for the current monthly mortgage payment on the typical U.S. home to stay in line with where it is now.

2020 was a remarkable year for the housing market, and much of that momentum is expected to continue pushing the market in 2021: 

• The typical U.S. home ended the year up 8.4% from the end of 2019. In Q4 alone, home values grew at the fastest quarterly pace ever recorded by Zillow, dating to at least 1996.
• Despite a weeks-long freeze in activity at the height of pandemic-related lockdown orders in the Spring, the number of homes sold in 2020 was up more than 5% from 2019 — and sales are expected to grow another roughly 20% in 2021. 
• Demand for homes stayed consistently high all year long, even through Q4, when cooling weather and holiday breaks typically slow home sales: In December, newly pending home sales were up 21.7% from December 2019. 

One major factor helping to fuel demand, and price growth in turn, is incredibly low mortgage interest rates. Current rates on a conventional, 30-year mortgage with a 20% down payment are at their lowest since at least 1971, helping to keep monthly mortgage payments exceptionally low — and affordability high — even as bottom-line prices keep rising.

But just because currently low rates are helping keep payments manageable doesn’t mean the current status quo will be the case forever. Home affordability is based on a number of factors — incomes, home value levels and growth, and interest rates themselves — which all can and do change rapidly over the course of a year. The best time to purchase a home remains deeply personal and should be based not simply on trying to time the market, but on what’s best for one’s own unique circumstances. Still, it can be useful to know just how much monthly mortgage payments may change in coming months in various markets, based on different home value appreciation and interest rate scenarios. 

Mortgage Math

As of December 2020, the typical U.S. home was worth $266,104. Assuming a 20% down payment and a 30-year, fixed-rate mortgage at the current prevailing rate of 2.68%, the monthly payment on that home would be $861, excluding taxes and fees. That is $45 less per month than a year ago, when the typical U.S. home was worth $245,517 and the average interest rate was 3.72%.

Currently, Zillow expects the typical U.S. home to rise in value by 10.5% through December 2021, to $294,086. Assuming mortgage interest rates hold at their current average level of 2.68%, then the monthly mortgage payment (again, without factoring in taxes and fees) on the typical U.S. home would rise to $952/month — up $91/month from current levels, or $1,092 over the course of a year. 

But even seemingly modest changes in home value appreciation can have noticeable changes in monthly payment amounts. Home values rose “only” about 8% in 2020 — assuming that level of growth, and again assuming rates hold steady at current levels, then the monthly payment in December 2021 would total $930, an extra $69/month or $828/year. Even so, home values did grow faster than anticipated in 2020, so we can assume they might outperform expectations in 2021, too. If we assume the typical home value rose by 12% over the next year, and rates remained the same, monthly payments would rise to $965.

But the pace of home value growth is only one part of the equation — mortgage interest rates themselves could rise, which would also impact monthly payments. Generally, we would expect rising interest rates to be correlated with slower home value growth as the affordability equation balances out. But for these napkin math purposes, it can be useful to see how rising rates impact monthly payments, holding all else equal.

Consider the same three home value appreciation scenarios as above, but at an interest rate of 3% — still exceptionally low by historical standards, but almost 40 basis points above the current record-low level. At this higher rate, and assuming home value growth of 10.5% in line with our expectations, the monthly payment in December 2021 would rise to $992, up 15% from current levels. Under the 8% appreciation scenario we’d expect a payment of  $969, and under 12% appreciation the monthly sum would rise to $1,005. 

Put another way: Even if U.S. homes grew in value in 2021 at the same rate as they did in 2020 (about 8%), the average rate on a 30-year, fixed-rate mortgage would need to fall to about 2.08% for December 2021 monthly payments to equal what they were in December 2020.

Location, Location, Location

Of course, these costs are based on the typical U.S. home value — but the actual local home value varies greatly from market-to-market, and in some areas is much higher or lower than the U.S. as a whole. And in more expensive housing markets, any potential increase in monthly payments as rates and/or home values rise will be more pronounced. For example, in December, the monthly payment on the typical Boston-area home (valued at $535,997) — assuming the same 20% down and currently prevailing rates — was $1,735. In Houston, where the typical home was worth $228,789 as of December, the general monthly mortgage payment was $740. 

Another factor to consider is that home value growth will not happen evenly across the country. For example, the typical home in Boston is expected to grow in value by 10.6% through 2021, and in Houston by 8.1%. If Boston home values rise as expected, and rates remain the same, monthly payments in Boston would rise to $1,919. In Houston, under the same scenario, monthly payments would rise to $800. If interest rates rise to 3.5% under these projected price increases, we’d expect monthly payments in Boston to be $2,130 and in Houston to be $888, differences of $395/month and $148/month, respectively, from where payments were in December 2020. 

As we’ve noted, low interest rates are helping keep down monthly payments while price appreciation is working in the opposite direction. While it’s good news for folks looking to rely on these lower rates today, it will take more time and money to save up for that initial down payment. There are also additional costs that offset some of the benefit of these low rates. 

For example, if folks put less than 20% down on their home — particularly as prices rise relative to their savings, and their nest egg totals a smaller share of their ultimate purchase price — this will further increase monthly principal and interest payments. And typically a down payment less than 20% requires borrowers to pay private mortgage insurance premiums, which could add up to hundreds of dollars annually. In a scenario where a homeowner purchased the typical U.S. home in December with a smaller down payment of 10% — quite common —  mortgage principal and interest would total $973, plus another $152 for private mortgage insurance monthly. That’s $262 more per month than if they’d made a 20% down payment.

Today’s historically low mortgage interest rates aren’t just great for folks looking to buy a home now, they’re also promising for homeowners looking to lower their current monthly mortgage payments. Today’s low rates mean there could be huge savings for homeowners who may have purchased their home years ago.

The graph below shows the savings from refinancing today, assuming different refinancing interest rates, a 20% down payment on the typical U.S. home value, prevailing average annual mortgage rates at the time of purchase, a flat $5,749 refinancing fee and a refinanced mortgage that continues for the remaining term of the original loan. We can see how different refinance rates have impacts on different borrowers based on when they purchased their home. 

It’s easy to see how the lower the refinancing rate, the greater the savings. Nearly all borrowers in this simulation would benefit from today’s sub-3% rates. Borrowers that purchased their home between 2000 and 2010, who faced higher interest rates at the time of purchase than purchasers this past decade, are likely going to save even if they refinance their home with rates as high as 3.5%. Those that purchased their home after 2010 are less likely to benefit from refinancing at a rate of 3.5% or higher. Folks that put down less than 20% on their home or whose homes were valued higher than the typical national home would expect to see even larger gains from refinancing.