A mortgage rate is the amount of interest you pay on a mortgage loan each year. For example, a 7% rate means you pay 7% of the loan balance per year in interest, not including principal.
Many first-time homebuyers think they’ve got everything figured out when it comes to buying a home. They saved up for a down payment, they’ve paid down their debt, and they’ve worked hard to get their credit scores where they need to be to qualify for the best rates.
However, as many of my clients have learned the hard way, mortgage rates can change everything overnight.
The Tough Lesson My Clients Never Saw Coming
In 2023, I had two borrowers fully pre-approved for a 30-year fixed mortgage at a rate of 6.875%. They put their home search on hold for a few months, hoping rates would come down.
With their lease set to expire, they decided it was time to move forward with their home purchase. Unfortunately for my clients, when it came time to lock in their rate, October mortgage rates reached 7.25%.
This seemingly minor uptick in rates added over $100 to their mortgage payment, even though their budget and personal finances hadn’t changed. In their case, the rate increase meant their dream home became less affordable overnight, all due to external market forces beyond their control.
What Is a Mortgage Interest Rate?
A mortgage interest rate is simply the cost of borrowing money, expressed as a percentage of your loan amount.
In other words, borrowing $100,000 at 5% means you pay $5,000 per year in interest. However, neither rates nor mortgage amounts are that low anymore.
A more realistic example: If you borrow $375,000 at 7%, you’ll pay about $26,000 in interest the first year, on top of your principal. That’s before you even factor in property taxes, insurance, or maintenance.
Even small changes in the rate can make a major difference over time.
| Loan Amount | Interest Rate | Monthly Payment (P&I) | Total Interest Over 30 Years |
|---|---|---|---|
| $375,000 | 7% | $2,475 | $523,000 |
| $375,000 | 7.5% | $2,622 | $569,000 |
In this case, the 0.5% increase would cost more than $46,000 in additional interest over the life of the loan, and an extra $127 per month.
Fixed vs. Adjustable Mortgage Rates
Fixed-rate mortgages are what most buyers choose—and for good reason.
Your rate and monthly principal and interest payment remain the same for the entire term of the loan. That stability makes budgeting easier and protects you from rising market rates.
Adjustable-rate mortgages (ARMs), on the other hand, start with a lower rate for a set period, typically five to ten years, before adjusting periodically. They can offer real savings upfront but carry risk if rates rise dramatically later on.
I’ve seen my borrowers benefit from ARMs when they knew they wouldn’t stay in the home long, saving a few hundred dollars a month compared to a fixed-rate loan. But for those planning to stay put, a fixed rate usually brings more peace of mind.
What Affects Mortgage Interest Rates?
Mortgage rates are shaped by many moving parts.
When inflation rises, so do mortgage rates
The economy heavily influences rates, as does the Federal Reserve policy, and the overall bond market, especially mortgage-backed securities (MBS). Investors won’t buy these bonds unless returns outpace inflation, so when inflation is high, mortgage rates usually climb.
I remember watching rates closely while I was saving for a down payment on my first house, only to see them climb as the economy shifted. Unfortunately, even with great credit, you can’t outrun market forces.
Your credit score matters a lot, too
Lenders use your credit score to gauge risk, and higher scores mean better rates. I’ve seen firsthand how even a small dip in credit can add hundreds to your monthly payment and thousands to your total loan cost.
Paying down debt and keeping your credit in good shape can make a real difference.
Loan type is another factor
Government-backed loans like FHA and VA often have different pricing and requirements. If you compare VA rates to conventional loan rates, the VA option will almost always have a lower rate (and no mortgage insurance), saving a significant amount each month.
Down payment size also counts
The more you put down, the lower your risk to the lender, and usually, the better your rate. If you can afford it, putting down 20% can help you avoid mortgage insurance, saving hundreds compared to those with minimal down payments.
Property type and loan size matter, too
Investment properties and jumbo loans usually come with higher rates. I’ve seen buyers surprised by the extra costs when purchasing multi-unit homes or properties above conforming loan limits.
How Rate Changes Affect Affordability
Here’s a look at just how much your interest rate can impact how much home you can afford.
Let’s say you’re buying a $400,000 home with 5% down:
| Interest Rate | Monthly Payment (P&I) | Total Interest Over 30 Years |
|---|---|---|
| 6.0% | $2,278 | $440,000 |
| 6.5% | $2,370 | $478,000 |
| 7% | $2,495 | $523,000 |
| 7.5% | $2,622 | $569,000 |
That $252/month difference between 6.5% and 7.5% adds up to nearly $91,000 over the life of the loan.
And remember, it’s not just about affordability, it’s also about building equity.
How to Get the Best Mortgage Rate
Here are five things you can do to improve your chances of getting the best interest rate:
Improve your credit. On-time payments, lower balances, and avoiding new credit inquiries can help.
Reduce your debt. Lenders look at your debt-to-income ratio. The lower it is, the better your rate.
Shop around. I’ve seen people save hundreds a month by comparing offers from different lenders.
Time your rate lock. Once you’re under contract, rates can change daily. Locking early can offer peace of mind in a rising market, but if rates dip, some lenders allow a one-time “float down.”
Choose the right loan product. If you know you’ll move soon, an ARM might make sense. Otherwise, a fixed rate is usually safer.
What About Those Too-Good-To-Be-True Rates?
You’ve probably seen ads for rates in the low 5% range. I’ve seen them, too!
Most of those come with fine print that includes perfect credit, huge down payments, or paying a large amount in loan discount points to buy down the rate.
In my experience, if it seems too good to be true, it usually is. Focus on your total monthly payment and lifetime loan costs, not just the headline rate.
And you may see some builders advertising ultra-low rates, but those are often paid for by higher sale prices or incentives baked into the deal. I’ve seen some of my buyers think they’re getting a great deal, until I show them how the cost was hidden elsewhere.
Final Thoughts
Just a slight increase in mortgage rates can add hundreds to your monthly payment, even if your budget stays the same. It’s not just about the price of the house; your interest rate shapes your long-term affordability and the total cost of owning your home.
Until your loan closes, your rate can still change. New credit inquiries, missed payments, or job changes can all affect your approval and your rate.
Keeping your credit and finances on track and understanding how mortgage rates work can give you a real advantage in today’s market.
