Why rates matter so much
Mortgage rates have been one of the most searched money topics of the past few years, and for good reason: on a 30-year loan, even a small rate change alters your payment for 360 months. The rate you lock in can make a bigger difference than negotiating a few thousand dollars off the purchase price.
A worked example
Take a $280,000 loan over 30 years. At 6% interest, the monthly principal and interest payment is about $1,679 and total interest over the life of the loan is roughly $324,000. At 7%, the payment rises to about $1,863 and total interest to around $391,000. That single percentage point costs about $184 a month and $67,000 overall. Try your own numbers in our mortgage calculator.
15-year vs. 30-year loans
A 15-year mortgage has a higher monthly payment but usually a lower rate and dramatically less total interest. For the same $280,000 at 5.5% over 15 years, the payment is about $2,288, but total interest falls to roughly $132,000. If you can afford the payment comfortably, it builds equity far faster.
How to get a lower rate
Lenders price risk. A higher credit score, a larger down payment (20% avoids private mortgage insurance on conventional loans), a lower debt-to-income ratio and stable income all help. Compare at least three lenders on the same day, because rates change daily, and compare the APR, which includes fees, not just the headline rate.
Points and refinancing
Paying discount points upfront lowers your rate. One point typically costs 1% of the loan. Divide the cost of the points by the monthly saving to find the break-even month; if you plan to stay longer than that, points can pay off. When rates fall significantly below your current rate, refinancing may be worth it, but include closing costs in the calculation.
Don't forget the full monthly cost
Your real housing payment also includes property tax, homeowners insurance and possibly HOA fees and mortgage insurance. Budget for all of them before deciding how much house you can afford.
Frequently asked questions
How much does a 1% higher mortgage rate cost?
On a $280,000 30-year loan, going from 6% to 7% adds about $184 per month and around $67,000 in total interest.
Is a 15-year mortgage better than a 30-year?
It saves a lot of interest but has higher payments; it's better if the payment fits your budget comfortably.
What is a mortgage point?
An upfront fee, usually 1% of the loan amount, paid to lower the interest rate.
How can I get a lower mortgage rate?
Improve your credit score, put more money down, reduce debt and compare several lenders.