In the wake of the COVID-19 pandemic, the government has taken a number of steps to keep the economy thriving. One of these steps has been to lower interest rates. In fact, recently, the Federal Reserve dropped their rates to the minimum possible, enabling banks to pass savings along to their customers in the form of low interest rates.
If you’ve been thinking about buying or refinancing a home, now is the time to act. Read on to discover some of the benefits you can reap from these low interest rates.
How Interest Rates Impact Your Mortgage
Before we dive into the ways that you can benefit from low interest rates, let’s talk some about the impact your interest rate has on your mortgage. Interest is the way the bank makes money on your loan – think of it as the cost of borrowing that money. If you have a good history as a borrower and your bank is confident you’ll pay them back, you may get a low interest rate.
Over the life of a mortgage, you’ll pay huge amounts in interest. Let’s say you buy a $250,000 home, put down a $50,000 down payment (20 percent), and get a 4 percent interest rate. Over the life of the loan, you’ll pay more than $146,000 in interest alone.
But if you get a 3.2 percent interest rate (the current national rate), you’ll pay $111,000 in interest on the same loan.
1. Lower Your Monthly Payment
One of the biggest benefits of getting a lower interest rate is that you can lower your monthly payment. Let’s take our $200,000 mortgage as an example; with a 4 percent interest rate, you’ll pay $955 per month before escrow. But with a 3.2 percent interest rate, you’ll pay just $865 per month.
That extra $90 may not seem like a lot, but it can add up in a hurry. If you pay that money into your mortgage, you could pay your loan off early, saving even more money on interest. You could also put that money into a savings account, use it to pay on a car, or spend it on something nice for yourself each month.
2. Get a Shorter Loan Term
A lower interest rate can also open up the possibility of getting a shorter loan term. In general, most people get mortgages for thirty years, and you pay interest throughout that time. But if your monthly payment is lower, you might be able to look at the possibility of a fifteen-year loan option.
In our $200,000 mortgage example, we calculated that $111,000 using a thirty-year mortgage and a monthly payment of $865. But let’s say you refinance to a fifteen-year mortgage; your monthly payment would be slightly higher, at $1,400 per month. But you would pay $52,000 in interest over the course of that fifteen years, saving you more than half on your interest payments.
3. Dedicate More Funds to Home Improvement
Let’s say you decide to stick with your thirty-year note, saving $90 on your mortgage payment each month. You put that $90 into a savings account, and in just two years, you’ve saved up $2,400. You can use that money to upgrade your kitchen, renovate a bathroom, or replace an appliance that’s started to wear out.
Reinvesting your savings into your home does more than just making it a nicer place to live. It also improves the value of your house, growing the equity you have in the home. When you get ready to sell, you’ll come out with way more than just the money you saved on interest, thanks to these home improvements.
4. Pay Ahead on Your Mortgage
Another fantastic option for the money you save thanks to a lower interest rate is paying ahead on your mortgage. You can keep the slightly higher monthly payment and put the extra money back into your mortgage. For one thing, this will give you some padding in case you ever hit rough times and can’t afford to make your mortgage for a month or two.
But paying ahead this way can also help you save even more money on interest. That money will eventually start going towards paying down your principal, reducing the amount of time you have to spend paying on your loan. If you paid $955 on the $200,000 mortgage we’ve been discussing, you would save $16,000 over the life of the loan, paying $95,000 in interest.
5. Refinance Out of Mortgage Insurance
If you already own a house, you may be reading this article and wishing you’d waited a few years to buy. But the good news is you don’t have to buy a new house to take advantage of these mortgage rates; you can refinance and get the lower rate! And, best of all, if you’re paying mortgage insurance on your current loan, you may be able to refinance out of that.
Some lenders require you to may insurance on your mortgage if you aren’t able to put down a 20 percent down payment. When you refinance, depending on the amount of equity you have and the amount you’ve paid into the principle, you may be able to afford a 20 percent down payment on the new loan. This can remove your mortgage insurance, giving you more money to reinvest back into your house.
Discover the Benefits of Low Interest Rates
Low interest rates are wonderful news for current and aspiring homeowners. You can lower your monthly payment, refinance into a shorter loan, and even pay ahead on your mortgage. All of this will help you save money and give you a better financial footing later in life.
If you’d like to take advantage of these historically low interest rates, check out the rest of our site at Ellis and Co. We have a range of homes in beautiful Southern Utah that are perfect for you and your family. Check out our communities today and start your move into a smarter, more beautiful chapter of your life.
Posted by David Ellis on
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