Mortgage rates matter – here’s how much a difference of just 1% could make
When you buy a house, the price of the real estate advertisement and advance payment is only a small part of the equation. Once you have signed the dotted line, paid closing costs and turned the key to your house, you have new numbers to consider.
One of the smallest (but most important) numbers homebuyers need to understand the interest rate – and how that applies to your financial goals.
Why interest rates matter
The interest rate affects the monthly mortgage payments on your current mortgage and the total amount you pay for your home. In recent weeks, interest rates have hit record highs. With mandatory quarantines and business closures in response to COVID-19, the The Federal Reserve cut interest rates to encourage spending.
These rate cuts have also affected some mortgage lenders and lending rates. Despite lower rates, many home buyers are struggling to qualify as lenders tighten their requirements in response to market uncertainty.
However, if you are able to buy or refinance your home with lower interest rates (even if it’s just a single percentage point) could save you thousands of dollars. With Credible’s easy online tool, you can compare prices from multiple lenders almost instantly – with no impact on your credit. See today’s rates below.
How important is a 1% difference in your mortgage rate?
The interest rate on your mortgage tells you how much you pay your lender each year just for getting the loan.
If you want numbers specific to your home purchase, you can use a mortgage calculator to customize your costs.You can also insert what you are looking for below and find the perfect type of loan for you.
Basically, a lower interest rate means a lower overall cost of your investment.
For example, consider a mortgage loan of $ 300,000 with a fixed interest rate of 4.5% and a term of 30 years. During the term of your loan, you will pay a total of $ 547,220 (or $ 247,220 in interest). Monthly payments on this loan would be approximately $ 1,520.
If you get the same loan at 3.5%, the cost of your investment over 30 years will be $ 484,968 ($ 184,968 in interest). Monthly payments on this loan would be approximately $ 1,347.
In this example, a 1% interest rate difference could save you (or cost) $ 173 per month or $ 62,252 over the life of your loan.
(Note: The above example only considers fixed rate loans. If you have a variable rate mortgage, your total costs would be different depending on how interest rates change.)
When shopping for a home loan, mortgage lenders who offer lower mortgage interest rates can lead to lower monthly mortgage payments and save you money over the life of your investment.
If you are a homeowner, now might be a good time to consider refinancing your home loan. Refinance your loan now is especially useful if you have an adjustable rate mortgage and your introductory rates will expire.
In addition, homeowners who have accumulated equity in their homes and homeowners who have improved their credit history In recent years, you might consider refinancing at a lower interest rate or a lower monthly payment.
Talk to a financial advisor or your lender to determine if refinancing will save you money. Remember to consider whether the cost of refinancing will offset the savings of a lower interest rate; it may not be worth it if the cost of refinancing is close to what you will save.
What factors determine your mortgage interest rate?
When a lender determines the mortgage rate, they look at a variety of factors, including:
There are some things you can do to get a better interest rate, including saving for a larger down payment, increasing your credit score, and being selective about where you buy your home. Other things, like lender fees and market trends, are beyond your control. You can (and should) talk to multiple lenders to save as much money as possible.
What is a good interest rate on a home loan?
Everyone has a “good” interest. People with a lower credit score may not be able to get the best interest rates. Additionally, your location will affect the range of fares available to you.
For example, according to the Consumer Financial Protection Bureau and at the time of publication, Alabama residents are seeing interest rates between 2.85% and 4.25%, depending on their credit score. In comparison, residents of California see rates between 2.65 and 4.875%. On average, most states average between 3.25 and 3.5 percent on most home loans.
The average interest rate at the same time last year was 4.27%, according to Freddie Mac. In 2018, the average mortgage rate was 4.44%. If you have a good credit score, look for lenders who offer interest rates of 3.5% or less for the best savings.