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Mortgage rates are dropping: How much does a 1% rate change actually matter? (Hint: More than you think)

Sarah Brady
How much does a 1% rate change matter to your mortgage? (sukanya sitthikongsak via Getty Images)

Finally, there's good news for homebuyers and for homeowners who want to refinance their mortgages: Interest rates are dropping to their lowest levels in years. Since October 2023, mortgage rates have declined by 1.44 percentage points — and they should fall even further after the Federal Reserve makes the first of several anticipated rate cuts this week.

While the year-over-year shift in mortgage rates may appear negligible, it can translate to unmatched savings. For the average borrower, a rate reduction of just 1% could mean a six-figure reduction in your interest charges and a significant drop in your monthly payment.

Here’s how much a single percentage point drop can affect the interest you pay, your monthly payments and prospects for refinancing, plus tips for getting the best rate on your next home loan.

Many homebuyers overlook the impact interest rates have on the cost of borrowing. Your annual percentage rate (APR) dictates how much your lender will charge you each month, and even small changes to your mortgage rate can add up to big savings (or costs) racked up over the life of your loan.

A 1% rate reduction can translate to paying tens of thousands of dollars less in three key ways:

  • It reduces your interest charges, which are the most expensive part of your mortgage repayment.

  • It lowers your monthly payments, freeing up money for other expenses.

  • It improves your chances of loan approval, because lower payments tell the lender you’re at less risk of defaulting on the loan.

The average mortgage in 2024 is roughly $400,000. Here's a look at what a 1% or 2% rate reduction on a 30-year fixed mortgage might save you on a loan that size.

If a 1% rate reduction still seems negligible after you look over those numbers, ask yourself this question: When will you ever have another chance to save so much money?

As a homebuyer, you might have (a lot) more control over your interest rate than you think. Here's what you can do to get the best offer from mortgage lenders.

The lowest mortgage rates typically go to borrowers with FICO credit scores of 760 or higher. But even if you can't hit that target, any improvement helps.

Maximize your credit score before applying for a mortgage:

  • Clean up your credit. Request your free credit reports from the federally authorized AnnualCreditReport.com and dispute any errors that could be hurting your scores.

  • Reduce your credit use. Lower your credit utilization by paying down your high-interest credit card debt — and, if possible, ask creditors to increase your credit limits.

  • Limit new credit inquiries. Don't apply for other loans or credit before applying for your mortgage. Instead, look for lenders that provide prequalification offers — sometimes called rate checks — which don’t require a hard pull on your credit that can temporarily lower your scores by up to 5 points.

To find out your credit score, start with your bank or credit card company. Many banks and issuers provide free access to a version of your scores through your online banking portal or smartphone app.

Note that it usually takes 30 or more days for new credit, lending and payment information to appear on your credit reports. If you make a positive change and you're in a rush for a lender to see the impact, you can ask them to use a tool called "rapid rescoring," which allows them to see your updated scores within a few business days.

Get mortgage preapprovals from multiple lenders so you can see how their offers compare. Then, use the offers to help you negotiate better rates with the lender of your choice. Some lenders are also willing to negotiate their fees — such as fees for the application, origination and underwriting fees and title insurance.

Request from potential lenders a breakdown of fees related to your mortgage, and then ask whether there’s room to lower or even eliminate one or a group of these fees. It never hurts to push — and it could save you thousands of dollars on your closing costs.

If you're not getting the offers you want, ask your loan officers what you need to do to improve your odds. For example, you might ask if you should pay off debt to increase your credit scores or save all of your money for the down payment instead. The answer could be different depending on your specific borrower profile.

Budgeting for a bigger down payment can reduce your mortgage rate, particularly if you put down 20% or more of your home’s purchase price up front. As an added benefit, with a down payment of at least 20%, you won't have to pay private mortgage insurance — insurance that’s designed to protect your lender against default.

Compare popular budgeting strategies to find the best fit with your savings goals, lifestyle and spending habits. Ultimately, that’s the one you’ll stick with.

Check to see if you qualify for federal, state or local homebuyer assistance. You could get a rate around 0.5% lower than average if you use an FHA loan and around 1% lower with a VA loan.

You might also qualify for a variety of first-time homebuyer programs, even if you've already owned a home. According to HUD and many different programs, you're technically a first-time buyer if neither you nor your spouse has owned any portion of your principal residence in the past three years.

Some lenders let you buy “points” up front to reduce your interest rate. Whether or not points can save you money depends on the details of the loan, but the expense is only worth considering if you plan to stay in the home for a long time and you have extra cash that you don't need for your down payment or closing costs.

If you took out a mortgage within the last couple of years, this could finally be a good time to consider refinancing for a lower rate. Here's when refinancing is most likely to result in a lower APR:

  • You’ve improved your credit. If your credit scores have improved since you took on the mortgage, you might qualify for a lower refinancing rate.

  • Rate savings outweigh refinancing costs. You're unlikely to save money if you're close to paying off your mortgage, considering the refinance lender's origination fees and any prepayment penalty, if your loan includes one.

  • You’ve gained equity in your home. If you’ve built up equity — whether by paying down the balance or through an increase in the market value (or both) — refinancing could be worth exploring.

  • You have an adjustable-rate mortgage. If you have an ARM and you're anticipating an upcoming rate increase, you might save money by refinancing into a fixed-rate loan.

  • You can roll savings into a shorter term. Lower rates are often available for loans with shorter repayment terms. While refinancing into a shorter loan usually increases your monthly payments, it can also translate to big savings on interest charges.

Before you accept a refinance loan offer, calculate your refinancing breakeven point with a refinance calculator — like this one from Fannie Mae — to compare the cost of paying off your current mortgage with the cost to pay off the refinance loan (with fees included).

Here are sample calculations for a borrower who took out a 30-year fixed $300,000 mortgage five years ago and is considering refinancing options for the remaining $282,395 owed. As you can see, it makes more sense to refinance to a shorter term, considering the upfront fees and long-term savings.

Dig deeper: 4 ways to get equity out of your home

Learn more about rates, mortgages and how to get the lowest rate you’re eligible for.

It might. A cosigner is someone who agrees to take legal responsibility for the loan along with you, and having one can help you get all-around better terms on your mortgage — including a lower interest rate. Though keep in mind that even if cosigner has stronger credit than you do, most lenders default to the lowest credit score among applicants when determining your mortgage rate.

Many lenders want to see that you’ve built at least 20% equity in your home before considering you for refinancing for the best rates with no private mortgage insurance. If you have good to excellent credit, some lenders and even mortgage types — like FHA and VA loans — will allow you to refinance with less equity.

No matter what type of loan — a personal loan, your mortgage or even credit cards — a one-point difference in your rate offers significant savings (or can cost you) when it comes to the interest you’ll pay.

If you borrowed $20,000 with a 60-month personal loan at a 9% interest rate, you’d repay roughly $24,900 — or $4,900 in interest over the life of your loan. Borrowing that same amount for 60 months at 8%, you’d repay about $24,332 — a savings of $568 in interest.

While that amount might not sound like substantial savings, it doesn’t include origination, processing and other fees that can vary from 1% to 10%, depending on the lender. Learn more about how fees and APRs work in our guide to personal loans — including total costs you can expect as a borrower.

Mortgages are treated differently from other debts, but how you write your will and set up your estate plan can make a big difference in what happens to your mortgaged home after you die — and how much of an asset you’re able to leave for your surviving family. Learn more in our guide to mortgages after a death — including steps you can take to avoid complications for your loved ones.

Sarah Brady is a finance writer and educator who covers a wide range of topics, from personal and small business credit and loans to financial scams. Her expertise has been featured in Yahoo Finance, Forbes Advisor, CNN, Fortune, Investopedia and other top media brands. As an NFCC-certified credit counselor, Sarah taught workshops on money management and coached thousands of clients on how to improve their credit. She is also a former HUD-certified housing counselor and educator for the City of San Francisco's affordable homebuyer programs.

Article edited by Kelly Suzan Waggoner

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