By Rich Green, Lender
If you’re thinking about buying a home, you’ll quickly discover that there are a lot of factors to consider. One of the first things you should determine is your comfort level with a monthly mortgage payment. Once you know what fits comfortably into your budget, you can work backward to determine an appropriate price range and loan amount.
One of the biggest factors affecting your monthly payment is the interest rate on your mortgage.
Mortgage Rates Are Not One-Size-Fits-All
We hear about mortgage rates in the news almost every week, but it’s important to understand that the rate being reported is not necessarily the rate you’ll receive.
Mortgage rates vary based on several factors, including:
- Your credit score
- The amount of your down payment
- The type of loan you’re obtaining
- The amount you’re borrowing
- Lender fees and discount points
That’s why it’s important to speak with a qualified mortgage professional who can evaluate your specific situation. Online rate advertisements can be helpful, but they often don’t ask enough questions to provide an accurate picture of what your actual rate might be.
How Much Difference Does a Rate Make?
Let’s look at a simple example. On a $400,000, 30-year fixed-rate mortgage, the monthly principal and interest payment would be approximately:
| Interest Rate | Monthly Principal & Interest Payment |
| 6.5% | $2,528 |
| 6.0% | $2,398 |
| 5.5% | $2,271 |
A one-percent difference in rate changes the monthly payment by more than $250. Even a half-percent difference changes the payment by about $130 per month.
That can make a significant difference in both the size of the mortgage you qualify for and whether the payment falls within your comfort zone.
What’s in a Mortgage Payment
It’s important to remember when looking at what monthly payment you are comfortable with that your payment isn’t only the interest and principal. Your monthly mortgage payment may also include a portion of money that will be sent to an escrow account.
Escrow accounts are accounts used to pay your bills, like HOA fees, property tax, and homeowners insurance. These all vary based on your home and where it is located, and by paying through an escrow account, you are able to make monthly payments that then cover these bills when they come due throughout the year (usually annually or every 6 months).
A mortgage professional will be able to help you estimate these costs as you budget your monthly payment range based on where you are looking for a home.
Don’t Get Caught Trying to Time the Market
One of the most common questions buyers ask is whether they should wait for rates to come down before purchasing a home.
The reality is that trying to time the mortgage market can be just as difficult as trying to time the stock market. If rates drop, more buyers often enter the market. Increased demand can lead to more competition, which can drive home prices higher. In some cases, buyers may find that the savings from a lower rate are partially—or even completely—offset by paying more for the home itself.
Instead of focusing on where rates might be next month, focus on whether the home fits your needs, your budget, and your long-term goals.
Focus on the Payment, Not the Prediction
The key is not to find the perfect rate. The key is to find a payment you’re comfortable with and a home that meets your needs. If you find a rate and payment that work for your budget today, don’t let the fear of missing out on a slightly lower rate tomorrow keep you from moving forward.
After all, successful homeownership is about the long term—not trying to predict the next move in the mortgage market.
Learn More About Mortgages
If you’re looking to learn more about your mortgage and lending options, check out our other articles!
