When you start thinking about buying a home, you’ll hear all about mortgage rates and how terrible it is when they go up, how great it is when they go down, or even why low mortgage rates are no good. always good.
Your mortgage rate is simply the sum of the interest charged by the lender you use to buy your home.
So how do you get this percentage? And how will it really affect how much you pay? For the purposes of this article, I’ll look at how just a 1% difference in your mortgage rate can make a big difference in how much you pay.
As you will see in the table below, a 1% difference when buying a $200,000 house with a $160,000 mortgage increases your monthly payment by almost $100. While the difference in monthly payment may not seem like much, a 1% higher rate means you’ll be paying roughly $30,000 more in interest over a 30-year term. Ouch!
How a 1% Difference in Your Mortgage Rate Affects How Much You Pay
In this example, let’s say you want to take out a $200,000 mortgage. If you get a 30-year mortgage and make a 20% down payment of $40,000, you have a $160,000 mortgage.
If you only deposit 10%, you will have a $180,000 mortgage. The following table shows how much you will pay – both per month and over the term of the loan – in each scenario.
| Mortgage rate | Payment, 20% down | 30 years. interest, 20% discount | Payment, 10% down | 30 years. interest, 10% down |
|---|---|---|---|---|
| 3.5% | $718 | $98,650 | $808* | $110,981 |
| 3.75% | $741 | $106,755 | $834* | $120,099 |
| four% | $764 | $114,991 | $859* | $129,365 |
| 4.25% | $787 | $123,357 | $885* | $138,777 |
| 4.5% | $811 | $131,851 | $912* | $148,332 |
* Payment amounts shown do not include private mortgage insurance (PMI), which may be required for loans with a down payment of less than 20%. The actual monthly payment may be higher.
This calculation also does not include property taxes, which can add significantly to the value if you live in a high-tax area.
In this example, a 1% difference in mortgage rate results in a monthly payment increase of almost $100. But the real difference is how much more interest you will pay over 30 years… more than $33,000! And just think, if you lived in the 1980s, when the highest mortgage rate was 18%, you would be paying thousands a month in interest alone!
You can calculate your mortgage rate yourself with our simple mortgage rate calculator.
Read more: Briefly about mortgage rates
What’s Happening With Mortgage Rates Now?
COVID-19 has driven mortgage interest rates to an all-time low, dropping to an incredible 2.67% in December 2020. But since then they have risen again. to pre-pandemic levels, reaching an average of 5.5% as of June 2022.
But don’t feel too frustrated. Consider that in the 80’s the typical mortgage rate was between 10% and 18%, and 5.1% doesn’t seem that bad by comparison. Of course, property values have risen since then, but mortgage rates themselves are still significantly lower than they could be.
How to get the lowest rate
Unfortunately, you don’t have much personal control over the average interest rates offered at any given time. But you have little control over the rates you will be offered compared to the average.
The first step to getting the lowest rate is to look at a few offers.
Credible is an online marketplace where you can get competitive mortgage rates from multiple verified lenders in real time. it streamlines the entire mortgage process, from pre-approval to closing, and asking for rates won’t affect your loan. You will start by filling out a quick application that will give you quotes from multiple lenders. If you like one of the quotes, you can connect to your bank accounts and upload documents to make the process not only fast, but also paperless.
Another option for getting quotes is Fiona. FROM fiona, you compare and buy mortgage rates from multiple lenders at once, so you can easily decide which offer is best for your needs. Your credit score won’t be checked until you decide to switch to one of the lenders, so there’s no need to worry about pre-qualification just ruining your score. The service is 100% free and you are under no obligation to contact any of the lenders who provided the quotes.
Other Determinants of Your Mortgage Rate
In addition to carefully researching a number of different lenders, there are a few key variables that will influence the rates offered to you:
Credit
Your credit score will be one of the most important factors in determining your mortgage rate.
Your mortgage is a loan, so just like any other loan, you will need a very good credit score to qualify for the best rate. This means a FICO score of at least 700. To get the best rates, a score above 740 is even more desirable.
An initial fee
The higher your down payment, the lower the mortgage rate. If you deposit 20% or more, lenders see you as less risky because you’re putting as much at stake as they are.
For the same reason, not only your down payment, but also the term of the loan determines your rate. The shorter your loan, the lower the risk for the lender. So, if possible, a 15-year mortgage is better than a 30-year mortgage.
Read more: How to save money on your down payment on a home
income stability
Your lender obviously wants to know that you have a stable job so that you can pay off the loan they give you.
If you’ve just changed careers, own your own business, earn your income primarily from freelancing, or have less than two years of work experience, you’re less likely to get better rates.
These scenarios demonstrate that your financial situation may have changed in the past. Even if you own your own seemingly stable business, it still puts you at greater risk because you have something to lose.
Read more: Getting a mortgage if you are self-employed
Region
Where you live may have something to do with your rate. Rates vary by state and generally depend on how well the housing market is doing in your state.
If the market is in good shape where you are looking, the lender will likely charge a lower rate because there is less risk of default.
Loan type
There are different types of loans you can qualify for that affect your mortgage rate.
15-year and 30-year mortgages are the most common, with a 20% down payment usually required. However, FHA loans (named after the Federal Housing Administration) require much lower down payments (only 3.5%). On the other hand, FHA loans may also require the homeowner to purchase private mortgage insurance, which protects the lender from default.
Mortgage scores – here’s why they matter
In the mortgage world, there are such things as points. Simply put, a point is an upfront payment paid for lowering your interest rate by a fixed amount (usually 0.125%).
For example, if you take out a $200,000 loan at 4.25% per annum, you can pay a $2,000 fee to bring the rate down to 4.125%.
Paying out points makes sense if you: 1) have the money to pay for them, AND you 2) plan to keep the loan for a long time.
If you don’t hold the loan long enough, the initial cost of paying for points often outweighs the interest savings over time. You will want to carefully consider the points. If you’re pretty sure you’ll be staying in your home for the long haul and that you won’t be paying off your mortgage or refinancing early, points can save you a lot of money.
However, if you pay points and move, refinance, or pay off your mortgage in just a few years, you’re likely to fare worse than if you didn’t pay points and instead took out a loan at a higher rate.
Summary
In short, mortgage rates matter. While a 1% difference may not seem like much, even if you compare monthly mortgage payments to a modest loan amount, the extra amount you can end up paying in interest is staggering.
And, of course, the larger the amount of your loan, the greater this difference will be. Being able to qualify for a low mortgage rate will reduce your monthly payment, yes, but it will also save you tens of thousands of dollars over your lifetime.