# Mortgage Rates Went Under 3%. Here’s How Much Homebuyers Stand to Save

Interest rates on America’s most popular home loan have hit a record low, dropping below 3% for the first time since mortgage giant Freddie Mac began tracking the metric in 1971.

That means potential homebuyers have a chance to save as much as $40,000 over the life of their loan compared with average interest rates from 10 years ago, according to a NextAdvisor calculation. The average interest for 30-year fixed-rate mortgages fell to 2.98% during the week ending July 16. That marks the seventh new low since March, below the previous week’s record low of 3.03%. Mortgage rates have been steadily falling since the Federal Reserve slashed its key interest rate to near zero earlier this year. “Mortgage applications over the last few weeks have been softening,” says Yelena Maleyev, associate economist at accounting and advisory firm Grant Thornton. “Because there was less activity in the mortgage market, it did give space for it to go a little bit lower,” she says of the record-low rate, cautioning that “it could come back up.” For now, though, borrowers who qualify for those low rates have a chance to save thousands on their mortgage repayment. ## How Much Cheaper Was a Mortgage in 2020? Your mortgage rate is the interest charged by the lender, the financial institution or bank that gives you the loan to purchase your house. So now may be an ideal time to buy if you’re financially ready. According to realtor.com data, median home prices across the nation rose 53.5% between early 2012 and summer 2019, but at the same time average mortgage rates have been falling. Between 2010 and now, the average rate for a 30-year fixed mortgage dropped from 4.56% to today’s 2.98%. That drop of 1.58 percentage points could save borrowers thousands of dollars a year. Let’s say you’re planning to buy a$150,000 property. If you get a 30-year mortgage with a 20% down payment of $30,000, you’ll have to finance$120,000. Over the life of your loan, at 2.98% interest, you’ll pay a total of $181,667—or$61,667 in interest. Monthly payments on this loan would be about $505. If you got the same loan at 4.56%, over 30 years you would have to pay back$220,431, including  $100,431 in interest. Monthly payments on this loan would be about$612.

### Pro Tip

Today’s low mortgage rates make homeownership cheaper. But rates don’t matter if you’re not prepared for all the responsibilities and expenses that come with a home, or can’t qualify for a mortgage.

Although the $107 difference in monthly payment may not seem that extreme, the higher interest rate would cost you almost$40,000 more in interest over the life of the loan. That extra \$40,000 over the span of 30 years could go toward retirement, paying other bills, or an emergency fund.

This example doesn’t take inflation into account, but inflation hasn’t been a big cause for concern in the U.S. economy for decades. Between 2011 and 2019, inflation has stayed near the Fed’s long-stated 2% goal, according to the U.S. Bureau of Labor Statistics. With demand relatively low due to the coronavirus pandemic, consumer prices have climbed only 0.6% in June compared to the previous year.

## How Lenders Determine Your Mortgage Rate

Multiple economic and regulatory factors, such as the Federal Reserve and the bond market, influence whether mortgage rates move up or down in general, but there are also other elements at play which are under your control. Knowing what those are can help you better prepare for buying a home or refinancing. Here’s a rundown.

### Credit

Your credit score gives lenders a snapshot of your overall financial situation at the time of your application. Lenders use your credit score to help them decide whether you qualify for a mortgage loan and how much interest they’ll charge for it.

The higher your credit score, the more likely you are to qualify for a mortgage with a lower interest rate. A low credit score could signal to lenders that you’re a high-risk borrower, and they may not be willing to lend you money.

Lenders have tightened their credit standards to offset risk during the pandemic, so the lowest mortgage rates are going to borrowers with excellent credit scores, in the high 700s and above.

“Lenders are just trying to keep their losses to a minimum because they’re not going to agree to a risky client right now, but that could change if we see really positive developments and things go back to how they were in January and February,” Maleyev says, referring to a possible return to economic growth after the pandemic.

### Down Payment

Generally speaking, a larger down payment will result in a lower interest rate. If you can put 20% or more down, lenders will typically reward you in the form of a lower interest rate, and you’ll avoid private mortgage insurance.

### Debt-to-Income Ratio

Among other things, lenders look at your debt-to-income ratio when considering you for a loan. It’s the comparison of all of your monthly debts to your gross monthly income, and gives lenders an understanding of how much of a monthly mortgage payment you can afford without financial constraint. A higher debt-to-income ratio could mean you’ll pay more interest, or be denied a loan.

### Location

Where you live and your local economy affects the mortgage rates for which you qualify. Lenders offer slightly different interest rates depending on what state you live in, and even nationwide lenders don’t quote the same interest rate everywhere. You can get a sense of rates available to you by using this tool available on the Consumer Financial Protection Bureau’s website.

### Type of Loan

Rates will change depending on what loan type you pick. There are several types of mortgage loans, such as conventional, Federal Housing Administration, and VA loans, among others. Every loan has different eligibility requirements, so talking to multiple lenders can help you understand all your options.

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