When you purchase a home, the real estate listing price and down payment is only a small part of the equation. Once you have signed the dotted line, paid the closing costs, and turned the key to your home, you have some new numbers to consider.
One of the smallest, but most important, numbers home buyers need to understand is your mortgage interest rate — and how it applies to your financial goals. Interest rates affect monthly mortgage payments on your current mortgage and the total amount you pay for your home. In the last several weeks, interest rates have hit record lows. With mandatory quarantines and business closures in response to COVID-19, the Federal Reserve dropped their interest rates to encourage spending.
How much does a 1% difference in your mortgage rate matter? The interest rate on your mortgage tells you how much you are paying each year to your lender for just having the loan. Basically, a lower interest rate means a lower overall cost of your investment.
For example, consider a mortgage loan for $300,000 with a fixed interest rate of 4.5 percent and 30-year terms. Over the life of your loan, you will pay a total of $547,220 (or $247,220 in interest). Monthly payments on this loan would be about $1,520.
If you get the same loan at 3.5 percent, the cost of your investment over 30 years will be $484,968 ($184,968 in interest). Monthly payments on this loan would be about $1,347. In this example, a 1 percent difference in interest rate could save (or cost) you $173 per month or $62,252 over the life of your loan.
The value (or cost) of 1% is amazing. Record low interest rates are making home ownership significantly more affordable now than it has historically been.