At the start of February, mortgage interest rates dropped to their lowest since 2016.1 Most people know this is good news, but not everyone understands exactly how it may affect them. Here’s a short explanation of the two big ways you may be able to benefit from falling mortgage rates.
Benefit 1: you may qualify for lower payments on a new mortgage
Whether you’re buying a new home or refinancing a current one, the lower your interest rate, the lower your monthly mortgage payment (all other factors equal).
For example, on a mortgage for $200,000, an interest rate of 4.5% (4.643% APR2) would equal a monthly principal and interest payment of $1,013, while a lower interest rate of 3.5% (3.635% APR2) would equal a lower payment of $898.
That’s a savings of $115 a month – or $41,400 over 30 years! The bigger the loan amount and the bigger the difference in rates, the bigger the potential savings.
Benefit 2: you may be able to afford a bigger loan and more home
The lower the interest rate on a new mortgage, the larger the loan you can afford (all other factors equal, once again). For example, a $200,000 mortgage with a rate of 4.5% (4.643% APR2) would have a monthly principal and interest payment that is about the same as a $225,000 mortgage with a rate of 3.5% (3.620% APR2).
Therefore, falling mortgage rates may allow you to buy a bigger home without increasing your monthly payment. The more rates drop, the bigger this benefit may be.
What this means for homebuying
If you’re planning to buy a new home, you picked a very fortunate time to do so. To ensure you can take advantage of today’s low rates, you need to lock in a rate with your lender in case rates increase later. At Draper and Kramer Mortgage Corp., we can lock your rate up to 90 days before your closing if you’re shopping for a home and up to 360 days before closing if you’ve already picked a specific property.
What this means for home refinancing
If you’re planning to stay in your home, it may be worthwhile to refinance your current mortgage. This may allow you to lower your interest rate and monthly payment and take advantage of other benefits such as removing mortgage insurance, getting out of an adjustable-rate loan or taking cash out for college, renovations or other expenses. However, you should weigh these benefits against the closing costs that come with refinancing your loan.
Your next steps
If you’re interested in learning what rate, loan amount and monthly payment you qualify for, get in touch to schedule a free mortgage consultation.
When refinancing an existing loan, total finance charges may be higher over the life of the new loan.
1 Based on the 30-year fixed-rate mortgage average as of February 6, 2020. Source: https://fred.stlouisfed.org/graph/?g=NUh
2 Annual Percentage Rate