One of the biggest purchases you are likely to make in your life is for a home. Many of us have to borrow money in order to buy a house. After all, few of us have a couple hundred thousand dollars sitting around for a home purchase.
When making this big decision, one of the most important aspects to pay attention to is your interest rate. The interest you pay on any loan — including on a mortgage — is the price you pay for borrowing money. The higher your interest rate, the more you will pay overall. On loan with a term of 30 years on such a large amount, the interest you pay can amount to more than $100,000. You can see why knowing your mortgage interest rate is very important to your financial big picture.
However, even though your mortgage rate is an important piece of information to know, more than one-third of Americans don’t know what they pay on their mortgages, according to a recent survey from Bankrate.
Are you knowledgeable about your mortgage rate?
The Bankrate survey indicates that about 35 percent of mortgage borrowers are “somewhat confident” to “not at all confident” that they know their mortgage rate. The remaining 65 percent are “very confident” that they know their mortgage rates. However, just because you feel confident that you know your mortgage it doesn’t mean that you actually do.
According to Bankrate, those who claim to feel confident about their mortgage rate knowledge might not be accurate. After asking homeowners to share their mortgage rates, and then checking the actual mortgage documents, many aren’t accurate. As a result, the number of those who don’t know their mortgage rate is probably higher than 35 percent, although those who are confident about their rates probably know what range they are in.
If you don’t know your mortgage rate, and you aren’t aware of how it compares with the national average, you could leave thousands of dollars on the table over the life of your loan.
Why your interest rate matters
Even though rates are near historic lows, many homeowners haven’t thought about refinancing, according Bankrate. Not only do many homeowners not know what their own mortgage rate is, but they also don’t know what the average national rate is. If you don’t know what the average national mortgage rate is, you don’t know how your rate compares. The rule of thumb is that if you can get an interest rate that is one percent lower than your current rate, it makes sense to refinance.
Quicken Loans’ refinancing calculator offers insight into how much you could save in interest. If you have a mortgage balance of $150,000, a monthly payment of $1,150, and your mortgage rate is 5.0 percent, you could save a great deal by refinancing to 3.90 percent. If you have 20 years left on your mortgage and you refinance to a 20-year loan, your interest savings would be $59,739.36. Refinancing to a 30-year loan would further lower your monthly payment and result in an interest savings of $21,299.17. In both cases, you can save tens of thousands of dollars and improve your monthly cash flow.
However, Bankrate points out that many homeowners stop thinking about their mortgage terms after the loan closes. Many homeowners just make their payments each month and stop considering the mortgage. However, since 2008, mortgage rates have come down quite a bit, and homeowners who don’t realize how low rates are now — especially in relation to their own mortgage rate — could be missing out.
The future of mortgage interest rates
Even though mortgage interest rates are low now, these rates might not last forever. Mortgage rates went up a little bit in March following the removal of the word “patient” in the Federal Reserve’s recent policy statement. After Fed Chair Janet Yellen insisted that the removal of the word didn’t necessarily mean an immediate rate hike, mortgage rates dropped again.
However, there are those that say that mortgage interest rates should start rising again later in 2015 or in early 2016. Because the Fed is expected to tighten monetary policy later this year, many expect Treasury yields to start rising. When the 10-year Treasury yield rises, mortgage rates often follow suit. As a result, those who don’t make the effort to refinance right now might miss out on lower rates — and miss out on saving tens of thousands of dollars over the life of a loan.
If you don’t know what your mortgage rate is, and you don’t know how it compares to the current national average, you could be leaving a lot of money on the table. Now is a good time to double-check your mortgage rate, and see if it makes sense to refinance.