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Right now, the average interest rate for a 30-year fixed-rate mortgage in the United States is 6.4%, according to Mortgage News Daily, the lowest level in 15 months. This is down significantly from a recent high of 7.52% in April and has made homeownership more affordable for many Americans.
With that in mind, here's a closer look at what mortgage rates mean for home buyers who want to purchase a $400,000 home right now.
A short answer
Now, this is just a basic example, and as we'll see in the next section, there are a lot of factors that determine your monthly payment.
Having said that, let's say that you want to buy a $400,000 home and that you plan to make a 20% down payment. This means you'll have to finance $320,000.
At the average 30-year mortgage rate of 6.4%, this means that you'll end up with a monthly mortgage payment of $2,001. For context, at the recent high mortgage rate of 7.52%, the payment on a loan of this size would be $2,243, so the new lower rate makes a significant difference.
Factors that could make your payment higher or lower
To be perfectly clear, this was just one example based on the national average mortgage rate, and it made some big assumptions. Your monthly payment could be significantly higher or lower, and here are some of the factors that will come into play.
Down payment
As you saw, the example is based on a 20% down payment, which has long been the industry standard. But it isn't a requirement. You can get a conventional mortgage with as little as 3% down in many cases, and FHA loans have a 3.5% requirement. If you put less money down, it can make your monthly payment higher, but it can help you get into a home of your own sooner.
Credit score
In most cases, you need a FICO® Score of 620 to qualify for a conventional mortgage loan, but the rate you get can depend on how strong your score is. In fact, as of this writing, the average borrower with a FICO® Score of 760 or higher gets a 5.965% 30-year mortgage rate. For context, someone with a score in the 640–669 range can expect a rate of about 7.008%.
Mortgage type
The majority of buyers choose a 30-year fixed-rate mortgage, so that's what I used in my example. But some choose to use a 15-year fixed-rate mortgage, an adjustable-rate loan, or one with a different loan term like 20 or 25 years. Plus, specialized loan types like FHA loans have different cost structures than conventional mortgage loans.
Your lender
You might be surprised at how the same buyer can get different interest rates from different lenders. Shopping around for a mortgage (applying with a few lenders) can be the best way to make sure you get the lowest rate possible, which can save you thousands of dollars in interest.
Taxes and insurance
These are the biggest X-factor for determining your mortgage payment. If you're a first-time buyer , you might not realize that virtually all lenders require taxes and insurance to be paid in monthly installments along with your payment, and this can add hundreds or even thousands of dollars to your monthly housing costs. I live in a suburban area of South Carolina, and taxes and insurance add about $500 to my monthly payment.
The bottom line
There are several factors that determine your monthly payment when you buy a home, but the recent drop in mortgage rates has made homeownership significantly more affordable for many people.
By shopping around for a mortgage, considering several loan types, saving for a larger down payment, and working on your credit score, you can put yourself in a position to keep your payment as low as possible.
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