How Does a 1% Interest Rate Change Affect Your Buying Power?

Even minor changes in mortgage rates, like 1% or 0.5%, can significantly impact what you pay over the life of your loan. When evaluating a home purchase, it’s easy to focus solely on the price to determine if it fits your budget. However, current mortgage rates are equally crucial in the affordability equation and they often change since you last did the math. Mortgage interest rates fluctuate frequently, influencing not only your monthly housing costs and long-term payments but also how much you can afford to spend on a home.

Given the mortgage market’s extraordinary volatility over the past two years, understanding how interest rates impact affordability is vital. Here’s how you can stay on top of rates to secure the best possible deal.

How Does the Mortgage Rate Affect Your Monthly Payment?

When you pay your mortgage every month, you’re paying down the borrowed amount (principal) and the interest on that money. These payments follow a fixed schedule where the initial payments are mostly interest, but over time, more of the payment goes towards the principal until the home is paid off, you refinance, or sell your home.

Olsen emphasizes that even small changes in mortgage interest rates can save or cost you money each month, affecting your purchasing power. “Those mortgage rates really do matter,” Olsen says. “Depending on your price point, even a half percentage point can increase or decrease the number of opportunities you can afford to move forward on.”

How Much of a Difference Does 1% Make on a Mortgage Rate?

To illustrate how changes in mortgage rates affect your monthly payment and purchasing power, consider the following examples. We examined a typical home nationally and in specific metros, assuming a 20% down payment and a fixed-rate, 30-year mortgage. These calculations exclude taxes and insurance.

A Typical U.S. Home, Valued at $346,900: $182 a Month

• At 7%: $1,846 monthly payment
• At 6%: $1,664 monthly payment (saving $182 each month)
• Over 30 Years: Save $65,691 in interest
• Buying Power Boost: Spend $30,480 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6%.

A Typical Home in San Diego, Valued at $919,800: $484 a Month

• At 7%: $4,896 monthly payment
• At 6%: $4,412 monthly payment (saving $484 each month)
• Over 30 Years: Save $174,178 in interest
• Buying Power Boost: Spend $80,772 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6%.

A Typical Home in Atlanta, Valued at $375,100: $197 a Month

• At 7%: $1,996 monthly payment
• At 6%: $1,799 monthly payment (saving $197 each month)
• Over 30 Years: Save $71,030 in interest
• Buying Power Boost: Spend $32,920 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6%.

A Typical Home in Dallas, Valued at $371,300: $195 a Month

• At 7%: $1,976 monthly payment
• At 6%: $1,781 monthly payment (saving $195 each month)
• Over 30 Years: Save $70,321 in interest
• Buying Power Boost: Spend $32,540 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6%.

A Typical Home in St. Louis, Valued at $241,500: $127 a Month

• At 7%: $1,285 monthly payment
• At 6%: $1,158 monthly payment (saving $127 each month)
• Over 30 Years: Save $45,735 in interest
• Buying Power Boost: Spend $21,127 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6%.

A Typical Home in Pittsburgh, Valued at $202,000: $106 a Month

• At 7%: $1,072 monthly payment
• At 6%: $966 monthly payment (saving $106 each month)
• Over 30 Years: Save $38,138 in interest
• Buying Power Boost: Spend $13,402 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6%.

How Much of a Difference Does 0.5% Make on a Mortgage Rate?

To see the impact of a half percentage point change, consider these examples:

A Typical Home in Phoenix, Valued at $451,600: $120 a Month

• At 7%: $2,404 monthly payment
• **At

6.5%**: $2,284 monthly payment (saving $120 each month)

• Over 30 Years: Save $43,233 in interest
• Buying Power Boost: Spend $19,059 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6.5%.

A Typical Home in Portland, Oregon, Valued at $524,870: $140 a Month

• At 7%: $2,794 monthly payment
• At 6.5%: $2,654 monthly payment (saving $140 each month)
• Over 30 Years: Save $50,238 in interest
• Buying Power Boost: Spend $22,145 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6.5%.

A Typical Home in Cincinnati, Valued at $270,800: $72 a Month

• At 7%: $1,441 monthly payment
• At 6.5%: $1,369 monthly payment (saving $72 each month)
• Over 30 Years: Save $25,919 in interest
• Buying Power Boost: Spend $11,342 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6.5%.

A Typical Home in Las Vegas, Valued at $411,600: $110 a Month

• At 7%: $2,191 monthly payment
• At 6.5%: $2,081 monthly payment (saving $110 each month)
• Over 30 Years: Save $39,392 in interest
• Buying Power Boost: Spend $17,360 more on a home without increasing the monthly payment if the interest rate drops from 7% to 6.5%.

Tips for Dealing with Volatile Mortgage Rates

Mortgage rates are notoriously hard to predict, making it difficult to time a purchase to capture a better interest rate. However, there are strategies you can employ:

1. Plan Flexibility in Your Budget: Are you shopping at the top of your budget, or do you have room in case rates change while you’re looking? Flexibility can also provide more options in a competitive bidding situation.
   • Pro Tip: Use an Affordability Calculator to see how your budget changes under different scenarios.
2. Talk to Lenders: Find a trusted lender who can walk you through various financial scenarios, including options to buy down the interest rate. This can help you act quickly if you find a home to purchase.
3. Prep Your Finances: Focus on improving your credit score, as lenders typically offer their best rates to borrowers with higher scores.
4. Consider Locking in Your Mortgage Rate: Changing rates can make it hard to decide when to lock in your rate. For most home shoppers, it’s generally best to lock your rate after signing an agreement to buy a home. Shop around since rate lock fees can vary among lenders.
5. Consider Whether to Refinance: Some buyers opt to purchase at one rate with plans to refinance when rates drop. This option has costs, with average refinance closing costs ranging from 2%-6% of the loan amount. Use a Refinance Calculator to see what refinancing might look like for you.

Mortgage Interest Rate FAQs

Will Mortgage Rates Drop? The days of mortgage rates below 3% are likely gone for the foreseeable future. Fluctuations around higher rates are expected as the Federal Reserve Board manages inflation. According to Zillow Chief Economist Skylar Olsen, “Rates bounce up and down with the jobs report, inflation numbers, and Fed meetings. Mortgage rates should ease, but probably not until the end of the year if not next. Until then, expect continued volatility in 2024.”

Should You Wait for Mortgage Rates to Drop to Buy a House? There are no guarantees that interest rates will drop, how much they might decrease, or if rising home prices will negate any potential savings. Additionally, a limited housing supply means you might not have the luxury of waiting. Olsen advises buyers to build relationships with lenders early on and consider refinancing later if they find the right home now. “Supply is ultimately very low,” Olsen says.

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By understanding how changes in mortgage rates affect your buying power, you can better navigate the housing market and make informed decisions. Whether planning for flexibility in your budget, improving your credit score, or considering refinancing options, being proactive and informed can help you secure the best possible deal.