Is a mortgage rate half a percentage point lower worth it? Here's how much you'd save.
Homebuyers in the last few years haven't had many great options. They could either purchase a home at today's elevated interest rates (which hit their highest point since 2000 last summer) or they could sit on the sidelines and wait for rates to fall (and hope that prices would stay where they were). In this scenario, many buyers have looked for ways to secure a below-average mortgage interest rate.
Fortunately, there are a few ways to do this including the purchase of mortgage points and/or the use of an adjustable-rate mortgage. Before proceeding with either, however, buyers should first understand what they stand to save with a lower mortgage rate - even if it's just half a percentage point below the average. Below, we'll detail how much you could save by going this route and why it may be worth pursuing right now.
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Is a mortgage rate half a percentage point lower worth it? Here's how much you'd save
On the surface, a mortgage rate that's just half a percentage point lower than the average rate doesn't seem to offer substantial savings. But while the savings won't be huge each month they will add up over the year and decades to come, especially considering that the average mortgage loan term is set for 30 years. Using Bankrate's mortgage calculator, here are three different rate scenarios that emphasize the savings potential (assuming a 20% down payment of $80,000):
- A 30-year, $400,000 mortgage at 7.29%: $2,191.00 monthly with the total cost of the loan being $789,603.
- A 30-year, $400,000 mortgage at 6.79%: $2,084.00 monthly with the total cost of the loan being $750,275.
- A 30-year, $400,000 mortgage at 6.29%: $1,978.00 monthly with the total cost of the loan being $712,747.
As can be seen in the difference between a 7.29% rate and a 6.79% rate, the buyer would save $107 each month and $39,328 over the life of the loan. That's a substantial amount of savings that can be secured simply with a mortgage rate that's half a point lower. So, for many, it may be worth pursuing now, even if rates are less than ideal.
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Why you should get a mortgage rate half a percentage point lower now
As the above calculations demonstrate, a mortgage rate half a percentage point lower will save you money each month and year, resulting in tens of thousands of dollars saved over the life of the loan. So, if you can secure a rate that much lower, whether it be via an adjustable-rate mortgage, mortgage points or simply by searching for the best lenders, it could be worth it for you now.
The context here is also important. Anticipation was high at the start of 2024 that a cut to the benchmark interest rate range - currently sitting at a 23-year high - was imminent. That would have naturally led to a cut in corresponding mortgage rates. But the inflation report for December showed inflation at 3.4%, significantly above the Federal Reserve's 2% goal. And January's report was better but at 3.1%. So more work needs to be done and interest rate cuts hoped for as soon as March may not now come until May or June, if not later.
All of this is to say that waiting and hoping for mortgage rates to be reduced may be fruitless right now. Instead, buyers ready and willing to act should strongly consider moving now, even if it means getting a rate just half a percentage point below today's averages. As the above calculations show, that rate difference can still add up to significant savings over time. And when the rate market inevitably stabilizes, buyers can always explore their refinancing options at that moment.
The bottom line
Today's rate climate isn't ideal but there are still ways for buyers to save money. Adjustable-rate mortgages and mortgage points both offer ways to do just that. And while neither will result in the 3% to 4% rates from recent years, they can potentially lower your mortgage rate by half a percentage point or more, resulting in substantial savings for the months and years to come.
