If you are taking advantage of these phenomenally low rates and financing your real estate purchase you may be surprised to know how much mortgage rates impact your monthly payments. Everyone knows lower interest rates are better and will save you money. Not everyone realizes just how much though.
4.5% Interest rate vs 3%
Let’s say you bought a $500,000 home a few years back when interest rates were at 4.5%. You put 20% down and got a 30 year fixed loan. Your monthly Principle and Interest (P&I) payments would be about $2027 for the next 30 years.
Fast forward to 2020 with today’s low rates. Let’s say you buy a $600,000 home with 20% down. You do have to come up with a little more down payment than you did with the $500,000 home. However, if you can get a very realistic 3% rate, your monthly P&I would be about $2024. Almost the same payment as the $500,000 home cost at a 4.5% interest rate.
By my calculation, a 1.5% change in interest rates can equate to $80,000 – $100,000 in purchasing power. That’s pretty amazing.
We are real estate agents, we are not mortgage brokers. Mountain Living Real Estate cannot quote you current rates or payment scenarios. Besides, every situation is different. We simply plugged numbers into our mortgage calculator and came up with this scenario. Try it for yourself and see just how much mortgage rates impact your monthly payments. The results may surprise you.
Reduce your interest rate
So how can you reduce your interest rate? There are actually a few options.
- Pay points. That basically means buying a lower interest rate. You are paying the mortgage company now the amount they could collect over the years. Generally, you have to stay in your home, without refinancing,for several years to make this option worthwhile.
- Put more money down. Additional money down will lower the risk to the lender and generally net you a better interest rate. Simply going from 20% down to 25% down can reduce your rate substantially. Discuss your options with your lender to determine if it’s worth the additional money out of pocket.
- Improve your credit score. The higher your score the better interest rate you may be offered. A score higher than 740 can offer you the best rates available. Improving your credit score substantially can take a lot of work and time. Small improvements may be a realistic option if you are close to cracking the next credit score bracket.
Low interest rates boost your purchasing power. The low interest rate climate we are experiencing now gives people the ability to afford a more expensive home while keeping their monthly payments lower. Low interest rates are predicted to last for a while yet. There is, however, no guarantee.