When it comes to mortgages, there are plenty of considerations you need to make. How long should your term be? How much will you pay as a down payment? Of all the considerations, your interest rate is the most important as it can ultimately determine how much you pay for your home over the course of your 15 to 30-year term. Below, you can learn more about how even small changes in your mortgage interest rate can influence your payments over time.
When you borrow money from any lender, you will be expected to repay the money you borrowed plus interest. Interest is the cost associated with utilizing a lender’s money, and it’s the lenders’ primary source of revenue. For a mortgage, the interest rate is an annual rate, which means it is divided by 12 in order to calculate your monthly interest payment. Assume you borrowed $100,000 from a lender to buy a home, and your interest rate is 3%. At first, 3% does not seem like a lot of money, but here’s how it works:
Your 3% interest rate is first divided by 12 (12 monthly payments in a year), and .03 divided by 12 is .0025, which is a small number. However, when you multiply that by the $100,000 loan, it pans out to $250 a month – and that’s just in interest. It doesn’t consider the payment on the underlying obligation – or the original $100,000 you borrowed – which is known in the financial world as the “principal balance” of your mortgage.
Using the aforementioned scenario, assume once again that you borrowed $100,000 to buy a home, but this time, the interest rate is 4%. Following the same math, .04 divided by 12 is .0033, and when you multiply that by the original $100,000 principal loan, you get a $333.34 monthly interest payment. That’s a difference of more than $83 a month in interest alone, and for some veterans, it can mean the difference between an affordable mortgage payment or one that strains their budgets to the breaking point.
To take this a step further, if you maintain your 4% interest rate over the course of a 30-year fixed rate mortgage, the difference is even more substantial. In one year, you will have paid $4000 in interest alone, so over the course of 30 years, that’s $120,000 just in interest – more than the value of your home. At a 3% interest rate, you will have paid $3000 each year, or $90,000 in interest over the course of your 30-year term. The single percentage point will save you $30,000 over the life of your mortgage.
If you are a veteran who is currently paying on a traditional mortgage and you would like to save money with a lower interest rate, consider refinancing into a VA home loan. Because these loans are partially backed by the US Department of Veterans Affairs, lenders will often provide veterans who have less-than-perfect credit the opportunity to refinance at a lower interest rate.