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How Much Can A 1% Difference In Your Mortgage Rate Save Or Cost You?

Hanna Kielar8-minute read

November 28, 2022

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Just how much does a 1% difference in interest savings stand to save you on a 30-year mortgage – and is it worth refinancing your home mortgage for 1% in savings gains? The typical answer is that if you can save 1% or more, you should refinance. Less, and the picture becomes muddier. In this article, we’ll take you through the calculations to make clear why 1% is considered the sweet spot.

A single percentage point increase in mortgage rate may seem like it would produce only a small increase in your monthly payment, but remember, over time, this increase can add up to a small fortune. Bearing this in mind, we take a closer look here at just how much a 1% drop in interest rates can potentially save you on your 15- or 30-year mortgage – and just how much money that all these savings can potentially help you put right back in your pocket. Read on to find out more.

How Do Mortgage Rates Work?

As anyone shopping for a new home or looking to refinance a home loan can tell you, it pays to lock in the lowest possible mortgage rate. That’s because a lower mortgage interest rate directly translates into smaller mortgage payments (and greater savings) each month.

In simple terms, a mortgage is a type of home loan offered to those who wish to borrow a set amount of funds for the purchase of a piece of real estate property. These funds – typically awarded to prospective buyers who either lack the cash to purchase a property outright or prefer to finance the purchase price of a home over time – are secured by the property being purchased. Existing homeowners also have the opportunity to refinance a current home mortgage by taking out a new loan (and paying off the balance of the first home loan) if they find that interest rates have fallen and that they can obtain better financing terms.

What Determines Mortgage Rates?

Mortgage interest charges – described in the form of a percentage rate – effectively define the amount of fees that are charged by a financial lender for the serving of your loan. Financial firms who extend mortgages to borrowers (such as banks, credit unions, and online lenders) maintain some control over these mortgage rates, but also need to remain competitive with other lenders. Noting this, fluctuations in mortgage rates set by the Federal Reserve, a government institution, tend to move with the shape of the larger housing and lending market. However, lenders do enjoy some flexibility in the interest rates that they choose to offer, with the best rates typically reserved for buyers with high credit scores, low debt-to-income ratios, a strong history of bill repayment, and a low-risk profile in general.

In other words, the government is a primary driving force in helping set and maintain mortgage rates in the market. Lenders tend to follow the general direction of the market, though they may also extend more favorable mortgage rates to certain home buyers (based on their financial history and risk profile) at their discretion. As a rule of thumb, the higher your mortgage interest rate, the more you can expect to pay in mortgage-related fees each month.

That said, two types of mortgages are generally available to buyers: fixed-interest rate mortgages (which lock in a set interest rate for the buyer) and adjustable-rate mortgages (in which interest rates can change after an initial period). When calculating your monthly mortgage payment, you’ll need to not only compute how much you’ll owe in principal and interest (monies paid toward actual loan balances and interest fees, respectively), you’ll also need to factor in expenses related to property taxes and insurance.

Several factors may impact the total interest that you can expect to pay over the life of your loan as well, including the term of the loan (15- vs. 30-year), your credit profile, down payment amount, and more.

How Much Difference Does 1% Make On A Mortgage Rate?

The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.

By way of example, say that Taylor, a 30-year-old who is a first-time home buyer, wishes to obtain a 30-year fixed FHA loan on a new home with a 20% down payment. Below, you can get a sense of just how much that they stand to save given a 1% difference in interest savings on their 30-year mortgage.

 

30-Year Fixed Rate Mortgage Rate 

 

30-Year Fixed Mortgage Rate

Monthly Payment*

Principal And Interest

[2.99%]

$1,073

$842

[3.99%]

$1,184

$953

[4.99%]

$1,303

$1,072

[5.99%]

$1,428

$1,197

 

As you can see, savings stand to be well over $1,000 in just the first year of Taylor’s home ownership alone. Multiply these savings by the entire life of a 30-year loan, and they’d potentially save enough to purchase a car, pay for a college education or even make major renovations or additions to the home.

In short, the difference that a 1% increase in mortgage rates makes could add up to tens of thousands of dollars in savings over the life of a 30-year loan term. By doing some simple math, it’s easy to find out if purchasing a home, refinancing a property, or pausing to work on your credit score is the right financial option for you. If your financial profile is in relatively good shape, it might be in your benefit to act sooner rather than later. Mortgage rates have been on the rise and are forecasted to continue doing so, so locking in your interest rate before they rise again can help to save you thousands of dollars over the life of your loan.

 

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15-Year Fixed Rate Mortgage Rate

Per earlier discussion, mortgages typically come in two common term lengths: 15 and 30 years. As you set about deciding whether a 15-year vs. 30-year mortgage loan term makes sense for your household, you will no doubt wish to do some simple calculations here as well. By crunching the numbers, you can get a better sense as to how much home you can afford, what monthly payments will look like, and which term length best suits your financial situation.

Again, going with the example of Taylor’s home purchase above (30-year fixed FHA home mortgage, 20% down payment), you can get a sense of just how much a 1% difference in interest savings stands to help.

 

15-Year Fixed Mortgage Rate

Monthly Payment*

Principal And Interest

[2.99%]

$1,611

$1,380

[3.99%]

$1,709

$1,478

[4.99%]

$1,811

$1,580

[5.99%]

$1,917

$1,686

 

As before, even a single percentage point drop in interest rates can help you save significantly on a 15-year mortgage. Noting this, it’s always important for those wishing to purchase a new home or refinance an existing property to secure the best mortgage interest rate possible.

On the bright side, whatever your mortgage interest rate ultimately winds up being, you also have the ability to pick between loan terms to decide on a mortgage payment plan that best suits your household budget and income. If you’re considering buying a home, your best bet is to start your mortgage application early on in the process so that you have a better idea of what you can afford. Having as much information as possible can help you more confidently choose the right loan option for your needs.

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How Much Does Half A Percentage Difference Save On A Mortgage?

Per earlier examples, a single point’s difference in mortgage interest savings can help you save significantly on monthly mortgage payments. But thanks to the power of compound savings, even a half a percentage point of home mortgage loan savings can also help you enjoy a major windfall in your monthly budget as well.

Wondering if it makes sense to take out a home mortgage or refinance if rates fall by half a point? The following chart – also based on Taylor’s earlier home purchase plan – can help you crunch the numbers to find out. Remember, these numbers don’t include factors like closing costs, so be sure to consider all relevant aspects when evaluating your situation.

 

30-Year Fixed Mortgage Rate

Monthly Payment*

Total Interest

[2.99%]

$1,073

$842

[3.25%]

$1,101

$870

[3.5%]

$1,129

$898

[3.75%]

$1,157

$926

 

Needless to say, it pays to keep on top of changing mortgage interest rates, shifting real estate markets, and the many financing options now available. Recently, mortgage rates have been trending upward, so if you’ve been waiting for rates to go down before you apply for a mortgage, you may be waiting a while. Alternatively, you may want to consider locking in your mortgage rate as soon as possible, before interest rates increase again.

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How To Lower Your Interest Rate

Borrowers looking to obtain the lowest possible interest rates and squeeze out a quarter or half a point in mortgage interest savings even amid market swings would do well to follow some simple strategies and tactics.

By way of illustration, some items that Taylor might wish to keep in mind as they weigh their options – wait to improve their credit, wait for a shift in market rates, accept a less-than-ideal rate with the intent to refinance when their credit improves, etc. – are as follows.

Improve Credit

Say that even though they have saved up enough money for a down payment on a home, or will be gifted these sums by relatives, Taylor’s credit score is under 650 and their income is low. Likewise, perhaps they have little history of bill payment and borrowing while they’re busy completing graduate school.

Alternatively, perhaps they’ve had some trouble paying off creditors (credit cards or utility providers) or meeting monthly rent obligations during COVID-19.

They may wish to wait until a later date (12 – 18 months down the road) when they’ve repaid more debt, established more of a credit history, and otherwise worked to repair their credit in order to obtain a more favorable mortgage interest rate before buying the home.

Note that while going about weighing any decisions here, it pays to consider the costs associated with improving your credit. For example, any monies paid to a landlord to rent an apartment for this period are not sums that will go toward investing in your own home equity and ownership.

Refinance Later

Perhaps Taylor’s credit score is just fine, and they wish to purchase now while a dream property is available, or market rates are relatively low, even though these interest rates have the potential to drop even further in the future.

They may wish to obtain a home loan now with the intent to refinance the property at a later date when market rates dip by a full percentage point or more, thereby allowing Taylor to reduce their mortgage payments by hundreds of dollars each month.

As above, any costs to refinance should be taken into account as one makes these calculations.

The Bottom Line: 1% In Pennies Adds Up To A Small Fortune

While it might not seem like much of a benefit at first, a 1% difference in interest savings (or even a quarter or half of a percent in mortgage interest rate savings) can potentially save you thousands of dollars on a 15- or 30-year mortgage. The same result can be achieved by refinancing your home mortgage to the tune of one less percentage point. Not only can you put these savings directly back into your purse or pocketbook, you’ll also get to enjoy their benefits both immediately and on a recurring monthly basis. Keeping this in mind, it pays (quite literally) to seek out and obtain the best mortgage interest rate possible.

If you’re ready to begin the home buying process, start your mortgage application online so that you’ll be ready to lock in your interest rate as soon as possible.

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Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto, RocketHQ, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.