The 1% Mortgage Hack That Could Save You $90,000!

How a 1% Difference in the Rate Changed Your Mortgage Since It's Been Signed

As you negotiate a mortgage or think about refinancing, any slight difference in mortgage rates ultimately makes a significant difference in the future. Since 2019, I've advised thousands of American families on mortgage decisions, and I can say from firsthand experience that one percentage point can really make a difference to a family's financial future.

Let me now define how much your mortgage rate being one percentage point more would save you each month with real amounts that matter for your budget.

The Bottom Line Answer: How Much Will You Save Per Month.

Bottom line: A 1 percent lower mortgage rate usually equates to somewhere between $60-65 savings per month for each $100,000 borrowed on a 30-year fixed-rate mortgage.

For example, most $300,000 mortgages would save almost $188 monthly with this reduced rate going from 6 percent down to 5 percent. That equates to well over $2,250 a year back in your pocket!

Understanding How Mortgage Payments Are Calculated

What comprises your monthly mortgage payment is what is important before delving further. The formula used to calculate mortgage payments can be given by lenders as follows:

Monthly Payment = Principal × r(1 + r)n/((1 + r)n - 1)

Where:

Principal is your loan amount

r is the interest rate charged monthly (which is the annual interest rate divided by 12)

n is the total number of payments (360 for a 30-year loan)

This formula may look tough, but the most important part in it is that very small changes in the interest rate (r) seem to create ripples throughout the whole calculation.

Exact Savings by Loan Amount

Table below shows exactly how much you would save in your monthly payments when you reduce your interest rate by 1% across varying loan amounts:

As you can see, the relationship is linear - doubling your loan amount doubles your savings from a rate reduction.

Long-Term Price Tag: Total Savings over Three Decades

Those amounts spent every month to save $60-$250 can greatly define the impact over time, say 30 years mortgage:

If $400,000 loaned, with just a one percent drastic rate cut:

Savings each month: About $250

Annually: More than $3,000

During the course of life: More than $90,000

That's correct; a seemingly minor 1 percent change in your rate may literally cost you the cost of tuition for your child.

Real-World Scenarios: When 1% Makes a Difference

Scenario I: First Time Homebuyer

First-time buyers stretched to the limit can find that a 1% lower rate makes the difference between having something they can afford and being out of the market altogether. A 1% reduction in interest rates increases affordability by some 10%, research finds.

Scenario II: Considering Refinance

The "1% rule" has been a benchmark for years in determining whether it makes sense to refinance. Of course, it depends on how much you are paying in rates now and how long you are planning to stay in your home. If you secured under 4% in the years 2020-2021, refinancing even at 5.5% would not make economical sense as that aligns with more than a 1% drop from current market rates.

Scenario III: Paying Points to Buy Down Your Rate

Many borrowers choose to pay some discount points (prepaid interest) when they close to get a lower rate. In general, paying 1 point (1% of loan amount) will reduce the interest rate by about 0.25%. Is it worth it?

On a loan of $300,000:

Cost of 4 points for 1% lower rate: $12,000

Monthly savings of 1% lower rate: $188

Break-even period: 64 months (just over 5 years)

If you plan to keep that home longer than the break-even period, it can be a sound financial strategy to pay points.

Factors That Influence Your Rate-Based Savings

Amount of Loan

As illustrated in our table, the higher the loan amount, the higher the actual dollar savings from the 1% rate difference.

Starting Interest Rate

Moving from 6.5% to 5.5% saves slightly more than moving from 6% to 5% on the same loan amount. This occurs because higher interest rates compound more aggressively over the years compared to lower ones.

Loan Term

The 30-year is what we focused on, but shorter terms like the 15-year show completely different impacts. A 1% drop on a 15-year mortgage usually results in a much lower total interest savings since it's paid off faster. Still, the monthly payment difference may actually be larger due to the compressed repayment schedule.

Secured a Lower Mortgage Rate

As per my experience with thousands of borrowers, below are some proven strategies of getting the lower rate:

Boost your credit score - Each 20 points above 700 may correlate to about a 0.125% reduction in your rate.

Increase your down payment - A 20% down payment eliminates PMI and also usually qualifies one for better rates.

Shop around with different lenders - Rates can differ by 0.5% or higher between lenders for the same borrower.

Consider paying points - Rate reduction will pay off if one stays in a house long-term.

Ask about first-time homebuyer programs - They usually offer below-market rates for those who qualify.

Conclusion: Should You Go After a 1% Lower Rate?

It's clear that a 1% difference in your mortgage rate translates to about $60-$65 in monthly savings per $100,000 borrowed on a 30-year mortgage. For average loan amounts between $300,000-$400,000, that means saving $175-$250 a month with lifetime savings between $63,000-$90,000.

Such figures clearly say that assigning some time to polish your finances before applying is well worth it and searching is necessary to grab the best rate possible. Whether it's your first home purchase or you're looking at refinancing, fully understanding what a 1% savings means on your mortgage can help you make smart moves that pay off for decades down the line.

The most common questions are:

How much will my monthly payment go down if mortgage rates drop by 1%?

On a $100,000 mortgage with a conventional 30-year fixed rate, a 1% reduction in rate decreases a monthly payment by about $60-$65. The new payment for a $300,000 home purchase would lower by about $188.

Is it worth refinancing for 1% lower interest?

Yes, generally. But this will vary according to personal situation. Break down your closing costs by the monthly savings, and if you are going to be in your house longer than that, it makes financial sense.

How much more house can I buy at 1% lower interest?

You have approximately 10% more purchasing power for a lower rate by 1%. For example, if you qualified for $300,000 for a loan at 6%, you might qualify at about $330,000 with 5%.

How much does 0.5 percent actually save in mortgage rates?

0.5 percentage points lower in rates would save you around $30-$33 every month for a standard $100,000 30-year mortgage. That's about $95 a month on a $300,000 loan.

Lower interest rates or lower closing costs: which is better?

It depends on how long you plan to carry the loan in question. Otherwise, if you are planning to live in your house for many years, one is better off sacrificing a higher closing cost for a lower interest rate because that typically produces a greater lifetime savings. If you will be in a house for a shorter time period, it may be better to keep costs lower at closing.

About the Author:

This article is written by Nitesh Miller, a finance expert and the founder of Fundaura. I have acquired over 6 years of experience in the mortgage industry and insights from pre-eminent finance executives, so every piece of advice in here is highly researched and applicable. Since 2019, I have advised and counseled thousands of American homeowners to make the right choices regarding their mortgages, thereby saving them millions, if not billions, in interest payments. I really hate fluff, so I usually give practical financial knowledge!