According to the
2024 NAR Buyers and Sellers Generational Trends, 80 percent of home buyers finance their home purchase. That number climbs to 96 percent for those 43 and younger. More than likely, you’re going to finance your home. That means it’s crucial to consider the cost of your mortgage — how much you’ll pay in interest — when calculating how much home you can afford, especially when taking advantage of today’s low mortgage interest rates.
How Interest Impacts Mortgage Payments
Mortgage interest is your lender’s payment for advancing you money to buy your home. Your mortgage payment will be part interest, part principal, and part escrow (money for paying taxes and insurance). If you have a $300,000, 30-year fixed-rate loan at a zero percent interest rate (wouldn’t that be nice!), your principal payment would be $833. That same loan at a 3 percent rate would require an interest and principal payment of $1,265 per month. At 7 percent, your monthly principal and interest payment would be $1,996. Digging deeper into how loan interest on a loan works, you learn that the amount that goes toward principal and interest changes each month due to amortization. During a loan’s early years, the percentage that goes toward interest is at its highest. With subsequent payments, less goes toward interest and more goes toward your principal with each payment. The longer you stay in your home, the more of the principal that is paid off and the more equity you have. (Equity is the current value of your home minus what you still owe on your mortgage.) Taking advantage of low mortgage interest rates can maximize these benefits by reducing the total interest paid over time.
Interest Rate Fluctuations
If you’ve been thinking about purchasing a new home for a while, you probably have seen interest rates fluctuate. While they haven’t dropped dramatically, today’s buyers are still watching for opportunities to take advantage of low mortgage interest rates. Mortgage rates have moved little this year, from just over 7 percent for a 30-year mortgage to an average of 6.67 percent in early July following five weeks of slight declines. This is down from the rates that stood over 7.5 percent in fall 2023 and well below the 14 to 18 percent rates of the early 1980s. Today’s 30-year rate is more than a percentage point below the historic average rate of 7.71 percent. Given our example of a $300,000, 30-year loan, your principal and interest payment at the start of the year would have been $2,004. At 6.67 percent, that payment would be $1,930. In July 1981, you would have paid $4,189 a month in principal and interest.
3 Ways to Lower Interest Rates on Mortgage
Several factors can help you secure a better interest rate, with good credit topping the list. According to Experian, an 820 credit score versus a credit score of 620 can result in an interest rate that is nearly 1 percent lower. A lower debt-to-income ratio can also shave off a fraction of a percentage point. Generally, mortgage lenders prefer the debt-to-income ratio to be below 36 percent for the best rates. Another way to lower your interest rate is with the type of loan you select. A 15-year fixed-rate mortgage will have an interest rate that is almost 1 percent lower than the 30-year rate. An adjustable-rate mortgage (ARM) also has a lower rate than a conventional 30-year loan, with the current rate at 5.81 percent for a 3/1 ARM. With this type of loan, you would have a fixed rate for three years and then every year after that, the rate could change based on market conditions. Buying a newly built home often gives you additional rate-busting incentives typically not available when purchasing a previously owned home. Builders will offer incentives such as lowering the price of a home, helping with closing costs or down payments, or reducing the interest rate through a rate buy-down. There are several variations to this, but generally, you’ll receive a lower interest rate for several years before it settles into a permanent fixed rate. For example, Santa Rita Ranch builder Highland Homes has an incentive that offers a 3.99 percent rate for year one of a mortgage, 4.99 percent for year two, and then a 5.99 fixed rate for the remaining life of the loan.
It Could Be Time to Buy
You could wait for interest rates to drop to a certain percentage, but you might be waiting a long time. All the while, the kids are growing, your home is getting older, or you’re still paying rent. Not to mention you’re missing out on all the advantages of owning a new home. With low mortgage interest rates still available through builder incentives, now may be the ideal time to make your move. Adding to the reasons to buy sooner is a
healthy inventory of new homes in Santa Rita Ranch. See what’s available now and make sure to talk to the builder representative about money-saving incentives.
Disclaimer: The mortgage calculators provided herein are third-party providers, and neither Santa Rita Ranch nor our, builders are making or providing any representations and/or warranties regarding the accuracy or the results generated by such mortgage calculators. The information and/or results generated by the mortgage calculators are for illustrative purposes only and are not an affirmation or representation that such information or results are applicable to you. The results shown are hypothetical and may not be applicable to your individual situation or the situation for which you are using the mortgage calculators. You should always consult a mortgage professional prior to relying on the results generated by these mortgage calculators. Rates change daily and the calculated results are intended for illustrative purposes only; accuracy is not guaranteed.
