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Even a fraction of a percentage difference in APR can add up to tens of thousands over the life of a 30-year loan. Compare average market rates to make sure you’re getting the best deal.
Why do I need to know the average mortgage interest rate?
When you borrow money to finance the purchase of a home, banks don’t just hand the funds out for free. Not only will you have to pay back the money you borrow, but you’ll also have to repay the interest that accumulates on that principal amount. Your lender sets the rate at which interest accumulates on the money you borrow. There can be substantial interest rate differences from one lender to the next, and they have a huge impact on the overall cost of your mortgage. Comparing the offered interest rate to the national average can help you quickly weed out the unfavorable options.
How much difference does a higher or lower interest rate make?
Even a slight variation in APR can add up to tens of thousands of dollars over the life of a mortgage. For example, let’s consider a $500,000 home loan with principal and interest payments and a loan term of 25 years. The table below shows the overall cost of this loan with an interest rate of 3.75% APR and 4.00% APR.
Mortgage A
Mortgage B
Interest rate
4.00% APR
3.75% APR
Loan amount
$500,000
$500,000
Monthly payment
$2,639.18
$2,570.66
Total cost of loan
$791,755.26
$771,196.80
Total interest paid
$291,755.26
$271,196.80
The 0.25% decrease in interest rate on Mortgage B adds up to over $20,000 saved over the life of the loan.
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While interest rates are undoubtedly important, they’re not the only factor that determines whether a home loan meets your needs. Other issues to consider include:
Fees. These include application fees, loan establishment fees, legal fees, ongoing fees, early repayment fees and more.
Loan to valuation ratio (LVR). This refers to the amount of money you are allowed to borrow relative to the value of the property you want to buy. It has a direct impact on the down payment size you’ll need to save up.
Payment flexibility. As well as choosing a payment schedule to suit your budget, some loans also allow you to make additional payments at any time so you can pay your loan off quicker.
Bottom line
Even a small difference in interest rate can have a big impact on how much your mortgage costs. Compare your options to find a lender with an APR, and other features, you’re happy with.
Frequently asked questions
Aside from finding the lowest rate, you can cut interest costs by saving up a bigger down payment. You pay interest on the amount you borrow, not the home’s value, and a bigger down payment means a smaller loan.
Interest rates are constantly fluctuating. With a variable rate mortgage, the interest rate you pay fluctuates with the bank’s rates. This means that you can save money when interest rates go down, but you’ll also have to pay more when interest rates rise. A fixed interest rate stays the same for an agreed-upon length of time. When the term is up, you’ll either need to sign a new term or it’ll revert to a variable rate. Check with your lender to find out what options you’ll have when your fixed-rate term is up.
Refinancing can be a great financial move in some cases, but it isn’t always the best option. Read our guide to figuring out when it’s a good idea to refinance to learn more.
Marc Terrano is a lead publisher and growth marketer at Finder. He has previously worked at Finder as a publisher for frequent flyer points and home loans, and as a writer, podcast host and content marketer. Marc has a Bachelor of Communications (Journalism) from the University of Technology Sydney. He’s passionate about creating honest and simple reviews and comparisons to help everyone get value for money.
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