With housing prices remaining elevated and mortgage rates higher than in past years, prospective buyers must understand the cost of a $900,000 mortgage. The monthly payment depends on several factors: loan terms, down payment, and current interest rates.
Interest rates and loan terms
Mortgage rates play an important role in determining monthly payments. As of late 2024, the average rate for a 30-year fixed mortgage is approximately 6.41%. For a 15-year fixed mortgage, rates tend to be slightly lower but require higher monthly payments due to the shorter loan term.
The loan term also heavily impacts monthly costs:
- 30-year fixed mortgage: Provides lower monthly payments by stretching repayment over three decades, but results in higher overall interest costs.
- 15-year fixed mortgage: Offers higher monthly payments but reduces the total interest paid.
Breaking down monthly payments for a $900,000 loan
Assuming a 20% down payment ($180,000), the loan amount would be $720,000. Below are estimated monthly payments based on current rates:
- 30-year mortgage at 6.41%: $4,508.36 per month
- 15-year mortgage at 5.78%: $5,990.53 per month
But what if rates were to fall? Let’s explore a scenario where rates decrease by 25 basis points, which is what the Fed’s first rate cut is widely expected to be:
- 30-year mortgage at 6.16%: $4,391.11 per month
- 15-year mortgage at 5.53%: $5,894.47 per month
Now let’s explore a scenario in which the Fed implements two 25-basis-point cuts in the coming months. If rates fall by 50 basis points to 5.91% and 5.28%, respectively, here’s what a $900,000 mortgage loan would cost:
- 30-year mortgage at 5.91%: $4,275.19 per month
- 15-year mortgage at 5.28%: $5,799.28 per month
These figures exclude additional costs such as property taxes, homeowner’s insurance, and private mortgage insurance (PMI), which can add hundreds or thousands to monthly payments.
How a lower interest rate impacts your payments
If rates drop due to Federal Reserve rate cuts, as anticipated by some economists, the savings could be substantial. For example:
- At a 6% interest rate, the monthly payment for a 30-year loan would drop to around $4,318, saving nearly $850 per month compared to current rates.
- However, delaying a home purchase in hopes of lower rates could expose buyers to rising home prices due to increased demand.
Factors influencing mortgage approval and costs
Several factors determine the final interest rate and loan terms offered by lenders:
- Credit Score: Higher scores typically secure better rates.
- Debt-to-Income (DTI) Ratio: Lenders prefer DTI ratios below 43%.
- Down Payment: A larger down payment can reduce the loan’s interest rate and eliminate PMI costs.
- Loan Type: Adjustable-rate mortgages (ARMs) often start with lower rates but carry risk as rates adjust over time.
