Why a small rate change costs so much
A mortgage payment is calculated so that principal and interest are fully repaid over the term, using M = P × [r(1+r)^n] / [(1+r)^n − 1], where r is the monthly rate and n is the number of payments. Because interest is charged on the outstanding balance every month for hundreds of months, a higher rate raises the cost of every one of those payments — and the effect accumulates over the full term rather than applying just once.
The rate-impact table
Each row is the same $300,000 loan over a 30-year (360-payment) term; only the interest rate changes. The payment and total lifetime interest are shown for each rate.
| Interest rate | Monthly payment | Total interest over 30 years |
|---|---|---|
| 5.0% | $1,610.46 | $279,767 |
| 5.5% | $1,703.37 | $313,212 |
| 6.0% | $1,798.65 | $347,515 |
| 6.5% | $1,896.20 | $382,633 |
| 7.0% | $1,995.91 | $418,527 |
What one percentage point is worth
Moving from 5% to 6% raises the monthly payment by $188.19 and increases total interest paid over the life of the loan by $67,748. Even a half-point — from 5% to 5.5% — adds $92.91 a month and $33,445 in lifetime interest. Because these differences persist across all 360 payments, the lifetime cost of a higher rate dwarfs the monthly figure that first catches a borrower's eye.
What this means when you borrow
The size of these differences is why lenders reward a stronger credit profile, a larger down payment and rate shopping with materially lower rates. It is also why refinancing can be worthwhile when rates fall — though refinancing has its own closing costs to weigh against the interest saved. Before committing, it is worth modelling the payment and total interest at the actual rate you are offered, not just the headline rate, since fees can change the effective cost.
Domande frequenti
How much does 1% add to a mortgage?
On a $300,000 30-year loan, going from 5% to 6% raises the payment by $188.19/month and adds $67,748 in total interest over the life of the loan.
Is a half-percent difference in mortgage rate significant?
Yes. From 5% to 5.5% on a $300,000 30-year loan adds $92.91 a month and $33,445 in lifetime interest — worth shopping around for.
Why does a small rate change cost so much?
Interest is charged on the balance every month for 360 payments, so a higher rate raises the cost of every payment and the effect compounds over the whole term.
How can I get a lower mortgage rate?
A stronger credit profile, a larger down payment and comparing offers from multiple lenders typically lower the rate. Refinancing can help when rates fall, allowing for closing costs.
Fonti
- Consumer Financial Protection Bureau — how mortgage interest rates affect cost; shopping for a mortgage. https://www.consumerfinance.gov/owning-a-home/
- Freddie Mac — Primary Mortgage Market Survey and the value of comparing rates. https://www.freddiemac.com/pmms
- Federal Reserve — consumer guide to mortgage rates and terms. https://www.federalreserve.gov/