By Sabrina Karl
When shopping for a mortgage, you’ll be faced with a sea of rates. But while it’s straightforward to decipher that 3.5 percent is a better rate than 4 percent, it’s not always easy to translate how that will affect your mortgage payments.
A quarter or a half percentage point may not seem like much difference, but it can add up in terms of how much you’ll pay over the course of a year. Take a typical mortgage of $200,000. If you opt for a 30-year fixed mortgage at 4.00 percent APY, your monthly payment for principal and interest will run approximately $955.
If you can qualify for a mortgage at 3.75 percent instead, so a quarter point lower, your payment will drop to around $925. Over the course of a year, you’d end up with about $350 more in your pocket than with the 4 percent loan.
What if you find an even better deal, or rates drop while you’re shopping, and you can score a 3.5 percent mortgage? Your payment would be lowered to under $900 and you’d save another $335 per year. That makes the savings from a rate of 3.5 percent vs. 4 percent (i.e., a half point decrease) about $685 a year, or $57 a month.
This is just one example, but if you borrow more, the impact of a half or quarter percentage point will become more significant. Borrow less, and the impact is more minimal. Likewise, if you borrow for a shorter period, such as a 15-year fixed mortgage, the rate impact will also be lower.
Making the right mortgage choice for you will take numerous factors into account, but it’s always wise to use a mortgage calculator to ensure you understand how different rates and terms will affect your payments.