How much does a 1% mortgage rate change affect your payment?

The interest rate you pay has a considerable effect on how much you pay for your home. So, is a 1% difference in your interest rate worth worrying about? Yes: Even a fraction of a percent difference in your mortgage rate can save you thousands of dollars on your loan.

Your interest rate also impacts your monthly payment, total interest paid, and overall buying power. We’ll show 30-year and 15-year examples and a quick way to estimate your own numbers.

Key takeaways:

• A 1% rate change can significantly affect your monthly principal-and-interest payment and the total interest you pay.
• The impact depends on loan amount, term, and rate, and shows up differently on 30-year vs. 15-year loans.
• You may get a better rate by improving your financial profile, comparing lenders, choosing points carefully, or refinancing if it makes sense.

How do mortgage rates work?

The mortgage rate determines how much you pay the lender to borrow the principal loan amount. Most of your early mortgage payments go toward paying interest. As you pay off the loan and your mortgage amortizes, more of your payments will go toward chipping away at the principal balance.

The interest rate you’re offered depends on market conditions, your credit score, down payment size, loan type, and interest rate type. You can choose a fixed-rate mortgage or an adjustable-rate mortgage (ARM). With a fixed-rate mortgage, your interest rate is set when you take out the loan and never changes, giving you predictable monthly payments. With an adjustable-rate mortgage, your interest rate changes every so often, which affects what you owe each month.

Our amortization tables show the total monthly principal and interest payment. Your actual monthly mortgage payment will also include the cost of property taxes and homeowners insurance, which vary based on your home’s value and location. Private mortgage insurance or mortgage insurance premiums along with HOA fees may also apply and raise your monthly cost.

How much does 1% change your mortgage payment?

Reducing your interest rate by 1% can save you thousands or even potentially tens of thousands of dollars, depending on the purchase price of your property, your overall mortgage rate, and the total mortgage amount.

On a fixed-rate loan, a 1% change often moves the monthly principal and interest payment by roughly $60 to $70 per month for every $100,000 borrowed. Your exact number depends on the term and rate.

30-year fixed-rate loan example

Say you wanted to buy a $420,000 home with 5% down using a 30-year fixed-rate conventional loan. Here’s what the monthly mortgage payment and total interest paid look like at a few different interest rates.

If you shop around and find a lender that offers you a 6% rate and one that offers 7%, the difference is $263 a month and $94,447 overall -  a significant sum.

An interest rate that’s 1% lower can also expand your buying power and allow you to buy a more expensive home. Let’s say you’ve budgeted for that $2,655 monthly payment but you’re able to get a 6% interest rate instead of a 7% interest rate. That’s the difference between a $399,000 loan and a $442,758 loan - giving you $43,758 more in borrowing power.

Our free mortgage calculator can help you see how the interest affects the cost of a loan.

15-year fixed-rate loan example

If you’re trying to decide between a 15-year vs. 30-year mortgage loan term, know that a shorter term can typically mean a higher monthly payment, but with an upside. Compared with a 30-year mortgage, a 15-year mortgage will mean a higher payment, but less interest paid overall. You’re paying the balance down faster, so total interest changes sharply even if the monthly difference looks smaller or larger.

Let’s look at what your monthly payments would be for that same $420,000 home with a 5% down payment but a 15-year fixed-rate mortgage.

Here, the difference between a 6% and 7% interest rate is $219 per month and $39,480 in overall interest.

Let’s say you wanted to keep that $3,586 monthly payment but you’re able to get a 6% interest rate instead of a 7% interest rate. That’s the difference between a $424,992 loan and a $399,000 loan - giving you $25,992 more in borrowing power.

How much does a 0.5% rate change affect a mortgage payment?

When you’re talking about the amount of money you need to borrow to buy a home and the length of the loan term, even a difference of a half point in the interest rate makes a difference. A half-point change can also matter when deciding whether purchasing points would be worth it. With points, you can reduce your interest rate by paying more up front at closing.

Here’s how much difference a half point makes when buying a $420,000 home with 5% down using a 30-year fixed-rate conventional loan.

How to research mortgage rate predictions

Interest rates are influenced by a variety of economic factors. Forecasts about where the market is headed consider financial market conditions, economic growth, employment data, inflation trends, and Federal Reserve policy signals. Keep in mind these forecasts are not guarantees and can change quickly as new economic data is released.

Freddie Mac offers a weekly Primary Mortgage Market Survey that can give you an idea of which direction rates are moving. Each month, Fannie Mae publishes a monthly housing forecast comparing current market conditions to previous years. You can also research commentary from established housing economists or research institutions.

It’s best to compare multiple sources instead of relying on just one forecast. Avoid trying to perfectly time the market. Instead, prioritize the overall affordability of your potential mortgage to make sure the monthly payment fits your budget.

How to get a lower interest rate

While you can’t control market rates, you can control your finances and choose your lender to get the best offer possible.

Shop around

It pays to shop around and compare offers from different lenders so that you can lock in the lowest possible mortgage rate. Here are some of the key loan features to compare and contrast:

• Interest rate vs. APR. The interest rate is the annual cost to borrow the loan, while annual percentage rate (APR) reflects the interest rate plus other fees.
• Discount points and lender credits. Discount points are up-front fees you pay to reduce your interest rate. Lender credits reduce your closing costs in exchange for a higher interest rate.
• Origination and other lender fees. These are the up-front fees that add up to your total closing costs.
• Rate lock terms. If you’re happy with your interest rate, lenders offer the option to lock it in so that it doesn’t change before closing – though the length of that lock can vary.

Improve your credit

Lenders review your credit to see how likely you’ll repay debt. Though it varies by lender, Rocket Mortgage typically requires a credit score of 580 for an FHA loan and for certain credit risk factors to be met for a conventional loan. Until recently, a minimum credit score of 620 was required to get a conforming conventional loan, though this requirement has since been eliminated by Fannie Mae and Freddie Mac.

You can improve or repair your credit by:

• Paying off debt
• Establishing a credit history
• Making on-time payments
• Refraining from closing accounts because account length helps improve credit
• Diversifying your credit types
• Disputing inaccurate information on credit reports

Refinance later

Refinancing can be a way to reduce your interest rate or monthly payment if market conditions change or your financial profile improves. While some borrowers look for at least a 1% rate reduction, there’s no universal rule. What matters most is whether the savings outweigh the cost of refinancing. Consider any costs to refinance as you make your calculations.

Consider discount points

Mortgage discount points cost money up front in exchange for a lower interest rate. This can save you money each month and for the overall cost of your loan. One point typically costs 1% of the loan amount, though the amount your interest rate is reduced varies depending on the lender.

You’ll hit your break-even point when the up-front cost of points is recouped by what you’re saving on interest. Calculating your break-even point can help you determine if buying points is worth it.

FAQ

Here are answers to common questions about how much a 1% interest rate difference affects mortgage costs.

How do I know I’m getting the lowest rate possible?

Shopping around will help you decide which offer has the best interest. Ask lenders for current interest rates, fees, the APR, and whether their rates are fixed or adjustable. This information will all be listed on your Loan Estimate. All lenders have to use the same standardized Loan Estimate form, which makes it easier to compare offers.

If interest rates drop, can I refinance my mortgage?

You can refinance your home if interest rates drop, your credit score improves, you need to add or remove a borrower, or to cancel private mortgage insurance. However, you’ll need to pay closing costs, so it’s a good idea to use a refinance calculator and figure out how long it will take you to break even to ensure it makes sense to refinance.

Why is my APR higher than my interest rate?

 Your interest rate is the cost of borrowing the loan amount, expressed as a percentage, and it doesn’t include fees. APR reflects the total cost of the loan by combining the interest rate with certain up-front fees and closing costs. Because APR includes these additional costs, it’s higher than the interest rate and can be a more useful way to compare loan offers directly.

How high can the interest rate go on my ARM?

The interest rate on an ARM will adjust depending on market rates. Most ARMs cap how much your rate can go up in any one adjustment and how much it can go up overall. Check your loan’s adjustment caps in your paperwork.

Can I buy discount points to reduce my interest rate?

Yes. Paying up front can reduce your rate for the duration of the loan. The amount your rate is reduced depends on the lender, loan details, and how long you plan to keep the mortgage. Calculating your break-even point can help you decide.

The bottom line: A 1% rate change can be a big deal

While a small percentage point difference in your interest rate may not seem like it would make a difference, it can save you a lot of money. Reducing your mortgage rate by just 1% can not only help you save on interest but also potentially help you afford a more expensive home. Be sure to shop around between lenders and compare offers to make sure you’re getting the lowest interest rate you can.

If you’re ready to begin the home buying process, start your mortgage application online.

Important Legal Disclosure:

Any figures, interest rates, loan examples, and market data referenced in this article are hypothetical or aggregated for educational purposes only. They are not intended to reflect current pricing, available terms, or personalized loan options for any consumer. This content does not constitute an advertisement of credit terms, a solicitation or offer to extend credit, or a rate quote under federal or state lending laws. Actual mortgage rates and terms are determined by individual financial qualifications, property characteristics, market conditions, and other factors, and are subject to change without notice.

If you are seeking current, real-time mortgage rate information please refer to the official live rate information and product details published at RocketMortgage.com/rates, where current pricing and various loan terms are made available.

To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.

This article is for informational purposes only and is not intended to provide financial, investment, or tax advice. You should consult a qualified financial or tax professional before making decisions regarding your retirement funds or mortgage.

Refinancing may increase finance charges over the life of the loan.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.