How Much Do You Save With a 1% Lower Interest Rate?

A 1% lower interest rate may not sound like much, but in reality, it can significantly impact your mortgage payment. For your typical homebuyer, a 1% rate decrease could slash their payments by hundreds of dollars per month, saving thousands each year.

How Much Can a 1% Lower Interest Rate Save Me?

Homebuyers often underestimate just how much their interest rate impacts their monthly mortgage payments. By going from an interest rate of 7% to 6%, a borrower could reduce their costs by 9.88% each month.

Here’s an idea of what your monthly principal and interest payments would look like on a 30-year fixed-rate loan at varying purchase prices, assuming a 5% down payment, and how much reducing your interest rate by 1% could save both monthly and over the life of your loan.

As the table demonstrates, a 1% rate reduction has a significant real-world impact. Recent data from the Federal Reserve shows that the nationwide median existing home sales price is $398,400. This means that a typical buyer could save around $250 per month and nearly $90,000 over 30 years by cutting their interest rate by a single percentage point.

What About a 0.5% or 0.25% Lower Rate?

If you can't manage to lower your rate by an entire percentage point, working to reduce your interest costs by 0.5% or even 0.25% is still a worthwhile target.

Savings With a 0.5% Lower Rate

Even 0.5% can add some extra cushioning into your monthly budget and amount to considerable savings by the time you make your final mortgage payment. In fact, our calculations show that shedding half a point off of a 7% interest rate drops your payment by 5.26%.

Here’s the same scenario as before, but with a half-point rate reduction:

By reducing your mortgage rate by 0.5%, even a modestly priced $250,000 home would cost you nearly $80 less per month.

When shopping closer to the national average at $400,000, half of a point equates to an extra $126 in your pocket, rather than your lender's, each month. By the time you pay off your loan, you will have saved more than $45,000 in interest payments simply by obtaining a 0.5% lower rate.

Savings With a 0.25% Lower Rate

What if you are only able to secure a 0.25% lower rate? Is it even worth the effort at that point? Let’s take a look at what the numbers have to say.

As you can see, even with just a 0.25% rate reduction, you can save a fair amount each month – 2.58% of your payment – which can add up over the life of your loan.

To put it in perspective, a single discount point on a $400,000 home costs you around $3,800, assuming a 5% down payment. At the standard rate reduction of 0.25% per point, this $3,800 expenditure would translate into nearly $23,000 in savings across your loan term.

Increased Home Affordability With a 1% Lower Interest Rate

What if you're comfortable with your current housing budget and would rather purchase a more expensive home than reduce your monthly payments? With a 1% lower interest rate, you can noticeably increase your home affordability.

“Reduction of interest rates directly affects home affordability, as it is proportional to the amount one can borrow,” says Leon Turkin, mortgage broker and CEO of Turkin Mortgage.

The actual amount that a lower interest rate will increase your homebuying budget is a little more individualized – other factors come into play when comparing different homes, such as:

• Property taxes

• Homeowners insurance costs

• Mortgage insurance rates

• HOA dues

But to give you a general idea, let’s look at how purchasing power based on principal and interest (P&I) payments at 7% would correspond with buying power based on the same monthly P&I payments at 6%.

Based solely on principal and interest costs, you could increase your purchasing power by around 11% by reducing your interest rate from 7% to 6%.

How a 1% Lower Rate Impacts Typical Home Costs Across the US

We mentioned that the median existing home sales price in the United States is $398,400. However, the typical property may cost far more or less in your local area.

Here’s a look at recent median sales prices, according to the National Association of Realtors, in 20 major homebuying markets across the country, and how much a 1% rate reduction could save borrowers in each locale.

*calculations assume a 5% down payment and 30-year fixed-rate loan term

Strategies for Obtaining a Lower Interest Rate

What does it take to lower your interest rate by a full percentage point? There are several different strategies you can use to reduce your monthly costs. You can even combine multiple techniques in order to stack up your savings – or expand your purchasing power – as much as possible.

Improve Your Credit/Financial Profile

Your overall credit profile has a significant impact on the interest rate that lenders will qualify you for. With most loan providers, borrowers who have a credit score of 740 or higher can expect to receive the best quotes. But while your credit score plays the most prominent role, it's not the only thing being assessed.

Additional factors that mortgage companies take into consideration include:

• Your debt-to-income ratio

• Savings and investment assets

• Employment/income history

• Late payments and other derogatory marks

Generally speaking, lenders will look at your credit and financial profile as a whole to determine how risky issuing you a loan would be. The lower your risk level, the lower the interest rate associated with your mortgage.

Make a Larger Down Payment

The larger your down payment, the greater the equity you begin with in your new home. Borrowers with a larger share of equity are seen as less risky as they’re more invested in keeping up their payments than someone purchasing with zero money out of pocket.

Plus, the more you put down, the smaller the mortgage insurance premiums you'll be responsible for, which can also reduce your costs. By putting 20% down, you can lower your interest rate and eliminate the need for mortgage insurance entirely.

But don’t worry if you can't do a complete 20%: even increasing your down payment from 5% to 10% can positively impact your quoted interest rate. This will also lower your monthly payments even further due to the smaller principal balance.

Not sure how to come up with a larger down payment? One solution is to apply to down payment assistance (DPA) programs. DPA is often offered through state housing finance agencies, county and municipal governments, and localized non-profit organizations. Many programs offer between 3% and 5% in assistance funds.

Related: How Much Do You Actually Need for a Down Payment?

Shop Around With Multiple Lenders

Interest rates can vary drastically from one mortgage company to the next. To ensure you're being quoted a fair rate, shop around for quotes from a minimum of three different loan providers.

Plus, obtaining multiple loan estimates allows you to use the best quote to negotiate with other companies and force them to compete for your business. This could be by offering you a more competitive rate or reducing the fees associated with obtaining a loan, leading to lower closing costs and allowing you to put more towards a larger down payment.

Purchase Lender Discount Points

Most lenders allow borrowers to purchase discount points to reduce their overall interest rate. Buying these points, which are paid for at closing, is essentially you prepaying a portion of your interest.

One discount point usually costs 1% of your loan balance and reduces your interest rate by roughly 0.25%. However, this can vary depending on your lender, loan type, and that day’s market movements. You can typically buy up to four points – equating to a 1% lower interest rate – although some lenders and loan types may have different limits.

“There is the option of getting lender discount points in exchange for a lower mortgage rate; this could be your best strategy if you plan to be in the house for quite some time,” reports Turkin.

Ask for Seller Concessions

It’s not uncommon for homebuyers to ask for seller concessions as part of their purchase agreement. These concessions are funds a property seller agrees to credit back to you to cover some or all of your closing costs, including lender discount points.

The percentage of the sales price sellers can offer as concessions varies based on the type of mortgage you're applying for and, with conventional loans, the size of your down payment. Depending on their mortgage program, borrowers putting 5% down are eligible for between 3% and 6% in seller concessions.

If you’re shopping in a buyer’s market, dealing with motivated sellers, or purchasing a home that’s been listed for a significant amount of time, asking for concessions to buy down your interest rate can be a powerful strategy to reduce your costs and generate sizable monthly savings.

Are Seller Concessions Better Than a Lower Purchase Price?

You may wonder why you would ask for seller concessions rather than offering a lower purchase price. While borrowers with a large down payment may be better off asking for a price reduction, buyers with limited funds often see much greater savings by requesting concessions and using the credit to buy down their interest rate.

For example, purchasing lender discount points to reduce your rate from 7% to 6% on a $400,000 home can have the same effect on your payments as dropping the price by nearly $40,000. In this scenario, even a 1% seller concession used to purchase a single discount point would be the equivalent of a price reduction of over $10,000.

Finding a Lower Interest Rate

Reducing their interest rate can save most homebuyers more than they realize. While a 1% reduction from 7% to 6% can cut monthly costs by nearly 10%, even lowering your quoted rate by just 0.25% can lighten the load on your budget and really add up throughout your loan.

Ready to find a lower interest rate? Apply with a local lender today, but don’t forget to compare quotes from at least two more to maximize your savings.