How much can a 1% difference in your mortgage rate save or cost you?
Jul 2, 2025
•5-minute read
The interest rate you pay has a considerable effect on the cost of buying a home. But how worried should you be about getting the best rate? Is a 1% difference worth worrying about?
Key Takeaways:
- A 1% difference in your mortgage rate makes a significant difference in how much you pay each month and in overall interest.
- The savings you can get from a lower interest rate apply to 30- and 15-year loans.
- To get the lowest interest rate, you can shop around, improve your credit score, and remember that you can always refinance later if rates go down.
How do mortgage rates work?
The mortgage rate determines how much you pay the lender to borrow the principal. It’s expressed as a percentage and used to calculate your monthly payment using a process called amortization that ensures the loan is fully paid by the end of your loan term.
The rate your lender charges will depend on market rates as well as your credit score, debt-to-income ratio, and the size of your down payment.
Mortgage interest is applied in two ways: Fixed-rate mortgages have an interest rate that never changes. Adjustable-rate mortgages have a fixed rate for an introductory period, after which the rate adjusts according to market rates every 6 or 12 months. That means the interest rate on an ARM can increase, which will raise your monthly payment. Lenders usually cap how much your rate can increase in any one adjustment. They also put an overall cap on how much your rate can increase over your initial rate.
How much does 1% lower 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.
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.
Interest rate |
Monthly payment |
Total interest paid |
5% |
$2,142 |
$372,091 |
6% |
$2,392 |
$462,194 |
7% |
$2,655 |
$556,641 |
8% |
$2,928 |
$654,979 |
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.
Our free mortgage calculator can help you see how the interest affects the cost of a loan.
15-year fixed-rate loan example
Does a 15-year vs. 30-year mortgage loan term make more sense for your household? By crunching the numbers, you can learn how much home you can afford, the monthly payment amount, and the total interest you’ll pay over your loan term.
Let’s look at how much interest you’d pay on a $420,000 home with 10% down and a 15-year fixed-rate conventional loan at different rates.
Interest rate |
Monthly payment |
Total interest paid |
5% |
$2,989 |
$160,056 |
6% |
$3,190 |
$196,160 |
7% |
$3,398 |
$233,563 |
8% |
$3,612 |
$272,226 |
Monthly payments are higher with a shorter loan term. But the difference between a 7% rate and an 8% rate is $214 a month and $38,663 overall.
How much does half a percentage point save you on a mortgage?
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.
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.
Interest rate |
Monthly payment |
Total interest |
5% |
$2,142 |
$372,191 |
5.5% |
$2,265 |
$416,572 |
6% |
$2,392 |
$462,194 |
6.5% |
$2,522 |
$508,903 |
7% |
$2,655 |
$556,641 |
7.5% |
$2,790 |
$605,352 |
8% |
$2,928 |
$654,979 |
Will mortgage rates rise or fall in 2025?
Mortgage rates are expected to remain steady and potentially drop later in 2025. The Federal Reserve’s recent rate pause may signal favorable conditions for cutting interest rates.
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
As anyone shopping for a new home or looking to refinance a home loan can tell you, it pays to shop around and lock in the lowest possible mortgage rate.
Improve your credit
Lenders review your credit to see how likely you’ll repay debt. Rocket® requires a credit score of at least 580 for an FHA loan and 620 for a conventional loan.
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
Saving 1% interest on your mortgage is a common rule of thumb for refinancing. If your dream property comes up for sale or market rates are relatively low, you can buy the home now and refinance when rates decline. Consider any costs to refinance as you make your calculations.
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 annual percentage rate, and whether their rates are fixed or adjustable.
If interest rates drop, can I refinance my mortgage?
You can refinance your home if interest rates drop. However, consider the following: Conventional loans allow you to refinance quickly, though cash-out refinances require you to wait six months before you can refinance. Government-backed loans often require you to wait a certain amount of time before you refinance. For example, Federal Housing Administration loans and VA loans require you to wait 210 days after closing to refinance, while USDA loans require you to be current on your mortgage for a year. You may want to refinance when rates are low, your credit score improves, you need to add or remove a borrower, you can cancel private mortgage insurance, or when your loan type allows it. 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?
An interest rate represents the annual cost of borrowing money, calculated based on the interest rate and the balance. It does not include upfront or ongoing fees. APR shows your annual cost of borrowing and includes your interest rate plus any fees associated with the loan. Therefore, the APR is higher because it represents the actual cost of borrowing, including interest and fees.
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.
Can I buy discount points to reduce my interest rate?
A discount point, also called a mortgage point, is a fee you pay at closing to reduce the interest rate on your loan. One point usually costs 1% of the loan amount. If you take out a mortgage for $400,000, one point will cost $4,000. You can buy fractional points or multiple points to lower the interest rate. The more you buy, the more your interest rate will decrease.
The bottom line: Saving 1% on interest is significant
While it might not seem like much of a benefit at first, a 1% difference in the interest rate on a 15- or 30-year mortgage can save you a lot of money.
If you’re ready to begin the home buying process, start your mortgage application online, so you lock in the lowest potential interest rate as soon as possible.
Melissa Brock
Melissa Brock is a freelance writer and editor who writes about higher education, trading, investing, personal finance, cryptocurrency, mortgages and insurance. Melissa also writes SEO-driven blog copy for independent educational consultants and runs her website, College Money Tips, to help families navigate the college journey. She spent 12 years in the admission office at her alma mater.
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