When it comes to buying a home, one of the most important considerations for buyers is the interest rate on their mortgage. The interest rate directly impacts how much a buyer will pay over the life of their loan, as well as their monthly mortgage payments.
Interest rates have gone up over the past year as the Fed looks for ways to combat inflation. Two rates you might see on the market today are 6.0% and 6.5%. If you have a better credit score and can put down a large down payment, you’ll receive a lower rate than someone with spottier credit history putting down the minimum down payment.
In this piece, we’ll examine the differences between a 6.0% interest rate, and a 6.5% interest rate.
If you’re looking at a higher rate right now, one thing to keep in mind is that if the interest rate does go down by a significant amount, you have the option to refinance. Read on to get the lowdown on how long it would take you to recoup the cost of refinancing.
6.5% versus 6.0% – what you’ll pay each month
Let’s assume that a homebuyer is taking on a $300,000 loan with 10% down ($30,000). If they were to secure a 6.5% interest rate on their 30-year mortgage, the monthly payments (principal and interest) would be approx. $1,970. Over the life of the loan, they would pay a total of $710,231 in principal and interest.
On the other hand, if the same homebuyer were to secure a 6.0% interest rate on their 30-year mortgage, their monthly mortgage payment would be $1,882. Over the life of the loan, they would pay a total of $677,529 in principal and interest.
That’s a difference of $32,702 in total payments over the life of the loan, and an extra $88 a month in mortgage payments. For some homebuyers, that might not seem like a lot of money, but over 30 years, it adds up.
Does it make sense to wait for a lower interest rate?
Given that even a .5% drop can mean shaving $100 off your monthly bill, it’s no surprise that some homebuyers are waiting for lower rates. However, it’s important to note that interest rates can fluctuate rapidly and unpredictably, and waiting for rates to drop can be a risky strategy. Home prices can also rise over time (which often happens when mortgage rates drop and buyers can afford more), which could offset any savings from a lower interest rate.
In a competitive market with high demand, waiting for interest rates to drop could mean missing out on your dream home. Conversely, in a buyer’s market with more inventory and less competition, waiting for a lower interest rate might be a more viable option.
Something else to consider is your long-term financial goal. If you’re planning to stay in your home for a long time, even a small difference in interest rates can add up over the life of the loan. In that case, waiting for a better interest rate might be worth it. Whereas if this is a starter home and you anticipate moving within the next 10 years, the higher interest rate will not impact you as much.
Ultimately, whether it’s worth it for a homebuyer to wait for a lower interest rate depends on their individual financial situation, as well as their risk tolerance. Some homebuyers might be willing to pay a little extra in monthly payments to secure their dream home now, while others may prefer to wait for a better interest rate.
Want to see how your actual numbers play out? We recommend playing around with Bankrate’s mortgage calculator (and once you’re serious about buying a house, consult a mortgage advisor – it’s free!).
What if the rate drops a year from now?
No one wants to experience buyer’s remorse – but that could happen if you buy a home at a high interest rate, then see interest rates drop! Luckily, there’s refinancing. Refinancing can lower monthly mortgage payments and potentially save homebuyers thousands of dollars over the life of the loan.
When you refinance a loan, you essentially replace your old loan with a new one. This means that you’ll have to cover some of the same costs you covered when you bought the home, like title insurance and loan origination fees – expect to cover roughly 1% of the loan’s cost. So for a $270,000 home loan, that’s $2,700.
If you buy a home with a mortgage interest rate of 6.5%, and a year later, the rate drops to 6%, you can refinance your mortgage to take advantage of the lower rate.
To determine how long it would take for the homebuyer to recoup their closing costs from the monthly savings of refinancing, we can divide the closing costs by the monthly savings. In this case, it would take the homebuyer approximately 2 years, and 7 months to recoup the closing costs from refinancing ($2,700 / $88 = 30.68 months).
If this homebuyer plans to stay in the home for longer than three years, refinancing would likely be a good financial decision. If they plan to move within the next few years, however, it may not be worth it to refinance, as they would not have enough time to recoup their closing costs.
It’s important to note that this is a simplified example; closing costs might be higher, and the monthly savings could be higher or lower. This also assumes the homebuyer will have enough cash on hand to refinance in the first place.
Ultimately, the decision to refinance depends on several factors, including the current interest rate environment, the homeowner’s financial situation, and their long-term goals for the home. Working with a qualified mortgage professional can help homeowners evaluate their options and make an informed decision about whether to refinance their mortgage.
Is 6.5% a bad interest rate?
Whether a 6.5% interest rate is considered “good” or “bad” depends on the current market conditions and your unique financial situation.
While a 6.5% interest rate may not be ideal, it may still be affordable for some buyers depending on their income, debt-to-income ratio, and other financial obligations. Some buyers in today’s market will decide that regardless of the current interest rate, they want to own a home – whether that means getting out of a current home that doesn’t suit their needs, or getting out of the rental cycle.
Mari Rogers is an experienced content manager specializing in real estate. She provides valuable perspectives on the latest trends and news in the field. In the moments she’s not imagining the possibilities of every derelict property on Realtor.com, she’s hanging out with her longtime (feline) companion Olivia Benson.