Mortgage rates matter — here’s how much just a 1% difference could make

When you purchase a home, the real estate listing price and down payment is only a small part of the equation. Once you’ve signed the dotted line, paid the closing cost and turned the key to your home, you have some new numbers to consider.

One of the smallest (but most important) numbers home buyers need to understand is the interest rate — and how it applies to your financial goals.

Why interest rates matter

The interest rate affects monthly mortgage payments on your current mortgage and the total amount you pay for your home. In the last several weeks, interest rates have hit record lows. With mandatory quarantines and business closures in response to COVID-19, the Federal Reserve dropped their interest rates to encourage spending.

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These rate cuts have affected some mortgage lenders and loan rates as well. Despite lower rates, many home buyers are struggling to qualify since lenders are tightening their requirements in response to market uncertainty.

Still, if you’re in the position to purchase or refinance your home, taking advantage of 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 rates from multiple lenders almost instantly — without any impact to your credit. Check out today's rates below.

How much does a 1% difference in your mortgage rate matter?

The interest rate on your mortgage tells you how much you’re paying each year to your lender for just having the loan. 

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If you want numbers specific to your home purchase, you can use an online mortgage calculator to customize your costs.You can also insert what you're looking for below and find the perfect loan type for you.

Basically, a lower interest rate means a lower overall cost of your investment.

For example, consider a mortgage loan for $300,000 with a fixed interest rate of 4.5 percent and 30-year terms. Over the life of your loan, you’ll pay a total of $547,220 (or $247,220 in interest). Monthly payments on this loan would be about $1,520.

If you get the same loan at 3.5 percent, the cost of your investment over 30 years will be $484,968 ($184,968 in interest). Monthly payments on this loan would be about $1,347.

In this example, a 1 percent difference in interest rate could save (or cost) you $173 per month or $62,252 over the life of your loan.

(Note: The above example only considers fixed-rate loans. If you have an adjustable-rate mortgage, your total costs would be different depending on shifting interest rates.)

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When you’re shopping for a home loan, mortgage lenders that offer lower mortgage interest rates can lead to lower monthly mortgage payments and save you over the life of your investment.

If you own a home, it may be a good time to look at refinancing your home loan. Refinancing your loan now is especially valuable if you have an adjustable-rate mortgage and your introductory rates will expire.

Additionally, homeowners who have accrued equity in their home and homeowners who have improved their credit history over the last several years might want to consider refinancing to a lower interest rate or lower monthly payment.

Talk with a financial advisor or your lender to determine if refinancing will save you money. Don’t forget to consider whether the cost of refinancing will offset any savings of a lower interest percentage rate; it may not be worth the hassle if the cost of refinancing is close to what you’ll save.

What factors determine your mortgage interest rate?

When a lender determines the mortgage rate, they look at various factors including:

• Current mortgage rates
• Market data and trends in your community (inflation, competition, etc.)
• Your down payment
• Your credit scores
• Lender fees
• Location of the property
• Loan type
• Price of the home

There are a few things you can do to help obtain a better interest rate, including saving up for a larger down payment, increasing your credit score, and being selective about the area where you purchase your home. Other items, like lender fees and market trends, are out of your control. You can (and should) talk to several lenders to save as much money as possible.

What is a good interest rate on a mortgage loan?

A “good” interest is different for everyone. Individuals with a lower credit score may not be able to score the best interest rates. Additionally, your location will affect the range of rates available to you.

For example, according to the Consumer Financial Protection Bureau and as of publication, residents in Alabama see interest rates between 2.85 and 4.25 percent, depending on their credit score. In comparison, residents in California see rates between 2.65 and 4.875 percent. On average, most states are averaging between 3.25 and 3.5 percent on most home loans. 

The average interest rate at this same time last year was 4.27 percent, according to Freddie Mac. In 2018, the average mortgage rate was 4.44 percent. If you have a good credit score, look for lenders who offer interest rates at 3.5 percent or lower to score the best savings.