Just this week the Federal Reserve lower the federal funds rate 0.25% to a target range of 1.75-2.00%. This rate is how much a local bank can borrow money from the Fed and then re-lend to consumers. So, that does ¼ of 1% mean to you as a home buyer in a lower interest rate charged?
The interest rate is the amount of money the bank charges you for borrowing the money to pay for your home. The principal of the loan plus the interest rate determines your monthly mortgage payment. With a fixed-interest loan, your total amount is divided by the length of the loan, and then again by 12 monthly payments. Even a .25 percent difference in your interest rate can add to your monthly payment depending on your loan amount. That number increases even more over the life of the loan.
If you are a first time home buyer, you have lots of things to consider. What part of town do you want to buy a home in? Is your credit good enough? How much of a house and what kind of payment can you afford? Your home will likely be your biggest investment in life, and it will impact all your future investment decisions.
Unless you pay your insurance and taxes directly (which most banks will only allow if you have a substantial down payment), your payment will include principal, interest and escrow payments to cover taxes and insurance. You can't control the principal or taxes, but you can shop for insurance and your interest rates.
Interest Rates
A bank or mortgage company will determine the interest rate you are charged based on current market conditions, as well as, your personal creditworthiness. The better your finances and credit, the better interest rate you can get on your loan. The interest rates on mortgages are compounded, which means that you're paying interest on the interest that has accrued every month as well as on the principal balance of the loan. This is why even a small change in the rate, although it can seem insignificant, it adds up when you consider the size and length of the loan.
The Payment Calculation
The standard formula for calculating a monthly mortgage payment is M= P[i(1+i) to the nth power] divided by [(1+i) to the nth power - 1]. "M" equals your monthly payment. The “i” is your interest rate divided by 12. The "P" stands for the principal of your loan and “n” is the number of payments, which will vary depending on the length of your loan. By entering different interest rates, you can calculate what different percentages would cost you per month. Now you don't have to get out the spreadsheet, and figure this out yourself. There are numerous online tools to help you calculate a monthly payment based on the term of the loan. Both the Houston Association of Realtors' and the National Association of Realtors' website both offers such online tools.
Doing the Math & What it Means
Just a few months ago, before the Fed initially lowered the Federal Fund Rate by 0.25%, the national average interest rate on a 30 year fixed rate mortgage was 4.2%. Just last week before the latest lowering of rates, the national average was 3.75%. If your interest rate is 4.2 percent on $200,000 of principal, your monthly payment would be $978. When the rate dropped by .25 percent, and the mortgage rates dropped on average to 3.75%, your monthly payment becomes $926. This difference of $52 a month, does not seem like a lot, bit it adds up quickly. Over the 30 years of the loan, the total payment would be $352,092 versus $333,443. With an additional decrease of 0.25% in the interest rate, that payment will decrease to $870/month, with a lifetime payment of $313,349. That means ever 0.25% decrease in interest rate will save about $20,000 over the life of the loan.
If you are thinking of selling, buying or investing in real estate, I would love to help. If you are in Houston, give me a call and me and my team will assist in any way necessary to make your needs a reality. If you are anywhere else in the USA or internationally, I have a worldwide network of affiliates that can meet your needs. And, since we are talking mortgages, if you need help in that area, I can always recommend a few bank officers and mortgage brokers to get you estimates.
Joe Tornberg, JD, MBA
joetornberg@kw.com
832.236.7671
FAQs
If your interest rate is 4.2 percent on $200,000 of principal, your monthly payment would be $978. When the rate dropped by . 25 percent, and the mortgage rates dropped on average to 3.75%, your monthly payment becomes $926.
How much is 25 of income on mortgage? ›
The 25% post-tax model
This model states your total monthly debt should be 25% or less of your post-tax income. Let's say you earn $5,000 after taxes. To calculate how much you can afford with the 25% post-tax model, multiply $5,000 by 0.25. Using this model, you can spend up to $1,250 on your monthly mortgage payment.
How much is a $300 000 mortgage payment for 30 years? ›
Monthly payments for a $300,000 mortgage
| Annual Percentage Rate (APR) | Monthly payment (15-year) | Monthly payment (30-year) |
|---|
| 6.50% | $2,613.32 | $1,896.20 |
| 6.75% | $2,654.73 | $1,945.79 |
| 7.00% | $2,696.48 | $1,995.91 |
| 7.25% | $2,738.59 | $2,046.53 |
5 more rowsFor a £450,000 mortgage at a 4.80% interest rate over 25 years, expect monthly repayments of approximately £2,578.
Is it better to have a 25 year or 30-year mortgage? ›
The Long-Term Cost: Higher Interest Payments
A 30-year mortgage means you will end up paying more interest over the life of the loan. The longer you borrow the money, the more interest you will accrue, which can amount to tens of thousands of dollars more compared to a 25-year mortgage.
Is 50% of income too much for mortgage? ›
The traditional rule of thumb is that no more than 28% of your monthly gross income or 25% of your net income should go to your mortgage payment.
How much is a 200K mortgage per month? ›
As far as the simple math goes, a $200,000 home loan at a 7% interest rate on a 30-year term will give you a $1,330.60 monthly payment. That $200K monthly mortgage payment includes the principal and interest.
What is the monthly payment on a $1000000 30 year mortgage? ›
How much is $1,000,000 mortgage a month? You can expect to spend around $6,653 a month with a 30-year mortgage term and $8,988 a month with a 15-year term. This assumes you have a 7% interest rate (and doesn't take into account property taxes, mortgage insurance, and property insurance).
How much is a $100,000 mortgage at 7 for 30 years? ›
Monthly payments for a $100,000 mortgage
| Annual Percentage Rate (APR) | Monthly payment (15-year) | Monthly payment (30-year) |
|---|
| 7.00% | $898.83 | $665.30 |
| 7.25% | $912.86 | $682.18 |
| 7.50% | $927.01 | $699.21 |
| 7.75% | $941.28 | $716.41 |
5 more rowsLet's go over five not-so-secret but super helpful tips for making that happen.
- Make extra house payments. ...
- Make extra room in your budget. ...
- Refinance (or pretend you did). ...
- Downsize. ...
- Put extra income toward your mortgage.
With $2,000 per month to spend on your mortgage payment, you are likely to qualify for a home with a purchase price between $250,000 to $300,000, said Matt Ward, a real estate agent in Nashville. Ward also points out that other financial factors will impact your home purchase budget.
How much will you pay on a 25 year $400,000 mortgage? ›
Monthly payments on a $400,000 mortgage will depend on the interest rate offered and your amortization period. For example, using principal and interest only, a $400k mortgage with a 5% interest rate and a 25-year amortization would have monthly payments of approximately $1,163.
How much difference does 1 percent make on a mortgage? ›
Over 30 years, the difference would save you $65,691 in interest. Buying power boost: If you budgeted about $1,846 a month for a mortgage payment, and the interest rate dropped 1 percentage point — from 7% to 6% — you could spend about $30,480 more on a home without increasing your monthly payment.
How much difference does $5000 make on a mortgage? ›
In general, estimate about $5 per $1,000 or $20 per $5,000 increase in the purchase price. Although it does differ slightly as interest rates fluctuate, this is the easiest way to estimate changes in your monthly payment.
How big of a difference do mortgage rates make? ›
The short answer: It can produce thousands or even potentially tens of thousands in savings in any given year, depending on the purchase price of your property, your overall mortgage rate, and the total amount of the mortgage being financed.
Will 25 percent down payment lower interest rate? ›
Borrowers who put down more money typically receive better interest rates from lenders. This is due to the fact that a larger down payment lowers the lender's risk because the borrower has more equity in the home from the beginning.
