In the world of mortgages, interest rates are crucial to determining whether a lender’s products are affordable and attainable, or out of your reach.
Of course until you actually look into the savings potential that comes with lower rates, you might not realize just how significant even small fluctuations can be on the cost of borrowing.
To bring you up to speed, here is a look at what you could save thanks to favorable interest rates on a mortgage.
Brief introduction to mortgage rates
Before delving any deeper, it is worth appreciating what factors are at play in determining how mortgage rates are decided. Current mortgage rates in 2021 come down to a combination of things, including the state of the economy, the level of price inflation on consumer goods, the rates set by the Federal Reserve and the level of demand in the housing market, to name just a few.
While these influences are many and varied, as a rule of thumb you can expect borrowing to remain affordable when lenders want to snare customers and regulators want to stimulate economic growth during trickier times.
Furthermore your own financial standing will be the final, and arguably most significant, element that determines the rates you are offered, so do not forget this.
Small changes, big gains
Now you know about rates, it is necessary to consider what a big difference is made by seemingly small variations in the amount of interest you pay on your housing loan.
While everyone’s circumstances will be different, it is still possible to gain an appreciation for this fact by taking a general example.
Say you buy a $300,000 property, paying a deposit of $45,000 to secure the mortgage and getting $255,000 from the lender which you will repay over an agreed term lasting 30 years. If you manage to get a loan at 3% interest for this, you will repay just over $1,075 of this each month for the duration. If, on the other hand, that rate is set at 4%, your monthly outgoings will rise to $1,217, before factoring in any other expenses like insurance and relevant property taxes.
While some people will be perfectly comfortable with seeing their monthly budget monopolized a little more by their mortgage payments, it is the cumulative impact of this change that really matters. You will be spending hundreds more a month, thousands more a year and tens of thousands more over the lifetime of the mortgage for just a 1% rate difference.
Flip the script on this state of affairs and manage to get a better rate, and the savings will be a real blessing.
Time & personal situation-sensitive considerations
When you sweep away all of the complex calculations at play, it really is a simple case of lower rates meaning a better deal for mortgage customers. However, as we touched upon earlier, there are other things to keep in mind when you start searching for a deal.
For example, you may be tempted to hold off in the expectation that rates will fall even further than their current levels in the near future, for the prospect of securing even greater savings. This is potentially suboptimal, because predicting what might happen to the market is something that even experts cannot get right a lot of the time. Therefore it is better to get the best deal available right now, rather than crossing your fingers and hoping for improvements further down the line.
Likewise if you do not have a large deposit saved, or you have a poor credit rating, then the rates offered to you by lenders may be much higher than the average anyway. So it is best to think carefully, compare thoroughly and get professional assistance if possible before committing.