How Interest Rates Affect Mortgage Payments | Hayden Homes

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August 31, 2021

How Interest Rates Affect Mortgage Payments

How Interest Rates Affect Mortgage PaymentsOver the past year, many new homebuyers jumped into the market to lock in a historically low interest rate before they rise. Even a one percent increase, in interest rates, can make a big difference! If you’ve been debating whether to buy now or wait, here are some things to consider.

Mortgage Basics

A mortgage is a secured loan used to purchase a home or other real estate property offered by banks, credit unions, or other financial institutions. Your mortgage payment consists of four main parts: principal (the total amount borrowed minus your down payment), interest rate (the amount the bank charges), taxes, and home insurance. You may need to pay private mortgage insurance is you put down less than 20% down.
If you want more information about mortgages, we deep dived on what exactly a home mortgage is in this post
There are two main types of mortgages: fixed and adjustable-rate. The type of loan you receive determines how your interest rate is calculated. Here’s how changes in interest rates can affect your mortgage payment.

Why Interest Rates Matter

Interest rates are the amount of money a bank charges you to borrow money and they directly affect the size of your mortgage payment. Higher interest rates mean higher mortgage payments and vice versa.
It’s important to remember that interest rates are compounded so you pay interest on the interest that’s accrued each month in addition to the principal balance! That’s why it pays to find the lowest possible mortgage rate.

How Much Can a Percentage Point Make on Your Mortgage?

One point may not sound like a lot but it is.
Let’s say you get a mortgage for $300,000 with a 30-year, fixed rate of 3.75%, this same loan will cost $500,270 with $200,270 in interest payments and a $1,390 mortgage payment.
If you get the same loan with a 4.75% interest rate, you’ll pay $563,789 in total over the life of your loan, with $263,789 going towards interest. Your monthly mortgage payment will be $1,566. This means you’re spending $63,519 more over the life of your loan!
Please note: this example is for illustrative purposes only. It does not include a down payment, taxes, insurance, or PMI. If you want numbers specific to your situation, please contact your lender.
When it comes to your mortgage, it pays to shop around. In short, mortgage rates matter – a lot! While a single percentage point may seem insignificant, it could end up being the difference of thousands of dollars over the life of your loan. This is why it’s worth shopping around to find a favorable mortgage loan, especially if you’re taking out a larger loan.

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