If the price of a gallon of milk goes down 1%, that’s an extra three or four cents you’re saving a few times a week. You probably won’t even notice it.
If a gallon of gas drops 1%, you’ll smile just a little bigger at the pump. After all, you just saved a couple bucks.
But how would a 1% drop in mortgage rates affect you? Let’s do some math and see. But first…
Know the TOTAL cost of your loan.
When you’re looking for a mortgage, you’ll see “APR” numbers everywhere. It’s the “Annual Percentage Rate” and it will be larger than your mortgage interest rate. APR rolls together mortgage interest with prepaid interest (a.k.a. “points”), broker fees and other closing costs. It’s actually the best way to compare mortgages apples-to-apples.
If mortgage rates go down 1%…
The folks at Zillow.com crunched the numbers and came up with some eye-opening data. Assuming you’re purchasing a $150,000 home, putting down 20%, and taking out a 30-year, fixed-rate mortgage:
- At a 5.5% interest rate, your monthly payment is $681. Drop one percentage point to 4.5%, and your monthly drops to $608.
- Just like that, you’ve got an extra $73 in your pocket each month. Enough for a large coffee a day.
- Now, stretch those savings out over a year and you’ve got almost $876, which can pay for a family weekend away.
- Say you stashed away your savings for the first 15 years of your mortgage. You’ve saved over $13,140, which can be used for home improvements or to pad your nest egg.
- And once you’ve paid off your mortgage after 30 years, you’ll have saved—drum roll, please—a whopping $26,280.
The big takeaway
Keep that 1% difference in mind while you’re mortgage shopping. Have a clear idea of how much of a monthly payment you can afford, and work from there. The lower rate you can secure, the more house you can buy with that same monthly payment.
There’s a lot to know about buying a home.
And you can count on Pen Air for the knowledge you need. Visit us online or at your local branch. Let us help you get in the door of your next home.