How to Get the Lowest Mortgage Rate

Learn strategies for getting the lowest interest rate

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You can get the lowest mortgage rate in part by getting your credit in shape, making a larger down payment, and choosing the right mortgage type and term.

Some factors affecting mortgage rates, such as the Federal Reserve’s response to economic conditions, are beyond your control. However, you can use some strategies when shopping for a mortgage that may help you reduce your interest rate. They include comparing lenders, locking in your rate, and buying points. Learn more about how to get the lowest mortgage rate. 

Key Takeaways

• To get the lowest mortgage rate, you can take steps to improve your credit. 
• You can also increase your income, reduce your debt, and save for a down payment to get a lower interest rate.
• Compare mortgage types and terms and get quotes from several lenders. 
• You can pay cash upfront to reduce your mortgage interest rate, but that’s not always the best financial move.

How Much Money Can You Save With a Lower Mortgage Rate?

Even a slight reduction to your mortgage rate can save you thousands of dollars per year. The table below shows the impact of three different mortgage rates on the monthly payment and total interest over the life of a 30-year, fixed-rate mortgage for a loan of $400,000. 

Credit Profile Fixes

Several financial factors impact your level of risk to a mortgage lender, which determines the mortgage interest rate you can qualify for. You can take action to improve each aspect of your credit profile before applying for a mortgage to get a lower rate.

• Credit score: Borrowers with excellent credit tend to qualify for the lowest mortgage rates. To improve your credit score, access your free credit report at AnnualCreditReport.com. Dispute any errors with the credit bureaus. Next, focus on improving your credit utilization by paying down debt, and be sure to pay your bills on time to build a positive payment history. The Consumer Financial Protection Bureau offers an interest rate tool you can use to see how your credit score may affect your rate. 
• Debt-to-income ratio: Mortgage lenders evaluate your ability to repay your home loan by calculating the share of your monthly income that you spend making minimum payments on your debts. This is known as your debt-to-income ratio (DTI). Some lenders may impose an upper limit on DTI. You can lower your DTI by paying off debt or increasing your income. A side hustle may help. 
• Cash reserves: Lenders also look at your liquid assets, such as savings and investment accounts you can easily cash out, when determining your eligibility for a mortgage. Lenders may require cash reserves for borrowers with low credit scores or high DTIs. Consider stashing some money in a high-yield savings account or brokerage account as you prepare to buy a home. If reserves aren’t required, you can use the money to buy points or make a larger down payment, two strategies that can get you a lower interest rate.

Shopping Strategies

Explore Different Types of Mortgages

When shopping for a mortgage, compare mortgage rates for different types of home loans. “Currently, government-backed loans have the better rate,” said Kristina Morales, a licensed mortgage loan originator and founder and CEO of Loanfully. These include FHA loans, VA mortgages, and USDA loans.

However, it’s important to consider costs beyond the interest rate. For example, FHA loans require you to pay mortgage insurance premiums, and VA and USDA loans come with funding or guarantee fees. Your credit profile will play a role in which mortgage type offers the lowest rate. 

Note

Shorter-term mortgages typically have lower interest rates than 30-year mortgages. Because you also pay interest for a shorter period, you can save money with a shorter-term mortgage, such as a 15-year term. However, you’ll need to make sure you can afford the higher monthly payment. 

Adjustable-rate mortgages (ARMs) also often come with lower initial mortgage rates. An ARM typically features a fixed interest rate for an initial period, such as five years. After that, the interest rate adjusts periodically.

The danger is that your monthly payment could increase after the fixed period. While many lenders recommend ARMs to homebuyers who plan to refinance or sell their homes at the end of the fixed period, your ability to do this will depend on the housing market and your future financial situation.

Compare Mortgage Lenders

“One way to ensure you get the lowest rate is to shop around,” Morales said. Different lenders may offer different rates to the same borrower, so it’s a good idea to get a handful of rate quotes. Just make sure to collect pre-approvals from different lenders within a two-week period to minimize damage to your credit.

Research from Freddie Mac estimates that borrowers who get quotes from two different lenders can save up to $600 per year. Borrowers who get at least four different rate quotes can save more than $1,200 per year.

As you compare mortgage lenders, pay attention to other factors besides the rate. Look at lender fees, the ability to close on time, and the loan officer’s responsiveness and communication.

Consider First-Time Home Buyer Programs

Most state housing finance agencies offer down payment assistance for first-time homebuyers, often with no repayment requirement. Some municipalities also have their own programs. Income limits and other requirements vary by city and state. These programs can help you boost your down payment amount, which may help you achieve a lower mortgage rate. Additionally, Housing Choice Voucher recipients can qualify for homeownership vouchers, which can help with both upfront and monthly homeownership costs.

Loan Purchase Choices

Lock in Your Rate

Many lenders offer the option to lock in your mortgage rate, which keeps your rate from changing before closing unless there are changes to your application. If interest rates increase after you lock your rate, “you are insulated from the additional interest expense,” Morales said. However, there’s a downside—if interest rates fall, locking your rate could mean missing out on a lower interest rate. 

Make a Larger Down Payment

Making a larger down payment impacts the cost of a mortgage in a few different ways:

• Putting more money down means borrowing less. That means you’ll be paying interest on a smaller loan amount. 
• If you put at least 20% down, you’ll avoid private mortgage insurance (PMI) on conventional loans. A larger down payment can also reduce your annual mortgage insurance payment on an FHA loan.
• Making a larger down payment lowers your loan-to-value ratio, which may lead the lender to offer you a lower mortgage rate. However, the Consumer Financial Protection Bureau (CFPB) notes that you might get a slightly lower interest rate when putting down less than 20% because the PMI required with the lower down payment reduces the risk to the lender.

Make sure to calculate the difference in the total cost of borrowing (including PMI) rather than just comparing the mortgage rates associated with different down payment options. 

Pay Points

Most lenders offer you the opportunity to purchase discount points in exchange for a lower mortgage rate. One point is equal to 1% of the loan amount. The lender will provide a corresponding interest rate reduction and note it on your loan estimate. 

Buying points to get a lower interest rate is not always the right move. Morales says you should consider several factors:

• Having the cash: Closing costs can be expensive, and you might not have cash left over in your bank account to buy points. Even if you do, it’s possible that putting the money toward a larger down payment may be more beneficial, so compare the total borrowing cost of various options. 
• Impact on your monthly payment: The interest rate reduction you’ll get in exchange for buying points varies depending on the lender. “If it is only going to save the borrower $15 to $30 a month, it may be better to keep the cash on hand,” Morales said. Remember that you could put the cash spent on points into a high-yield savings or investment account instead, so there’s an opportunity cost to consider. 
• Break-even point: “The borrower should seek to understand how long it will take to break even on the additional expense incurred to purchase discount points,” Morales said. For example, if it will take five years to recoup the cost of points via monthly payment savings, consider whether you might sell the property or refinance before then. 

Other Factors That Affect Your Mortgage Rate

• Homebuyer demand: A strong economy and low unemployment may increase prospective homebuyer demand for mortgages. Since lenders have a limited supply of money to lend, they may increase mortgage rates when demand is high. On the other hand, low demand for mortgages may lead lenders to decrease their rates.
• Inflation rates: High inflation can reduce a lender’s return, especially on longer-term, fixed-rate mortgages. Lenders may increase interest rates during periods of high inflation as a result. 
• The Federal Reserve’s monetary policy: The Fed adjusts the federal funds rate to either encourage or discourage economic activity by making it more or less expensive for businesses and consumers to borrow money. Though the Fed doesn’t determine mortgage rates directly, tight monetary policy (a high federal funds rate) tends to lead to higher mortgage rates.

Frequently Asked Questions (FAQs)

How Do I Get a Lower Interest Rate on a Mortgage?

Get a lower interest rate on a mortgage by improving your credit score, increasing your income, making a larger down payment, or taking out a shorter-term mortgage. Comparing mortgage lenders can also ensure you get the lowest mortgage rate, and buying points upfront to reduce your rate may be advantageous in some cases. 

How Do I Ask for a Lower Mortgage Rate?

You can always ask a lender for a lower mortgage rate, but in many cases they may require you to buy points to get a rate discount. Shopping around can help you get a lower mortgage rate, however. 

Can You Negotiate Mortgage Rates?

Yes, mortgage rates are negotiable to an extent. You’ll have the best luck negotiating if you have a strong credit profile and are making a sizable down payment. Comparing lenders can also help you get a lower rate.

Can I Lower My Mortgage Interest?

Refinancing to achieve a lower mortgage interest rate is one way to reduce mortgage interest. Refinancing replaces your old home loan with a new one, which can also lower your monthly payment. However, there are upfront costs to consider. You can also make extra payments toward your principal to reduce the interest you’ll pay over time.

The Bottom Line

When average mortgage rates are high, there are a few strategies you can use to get a lower rate, including improving your credit, choosing a shorter term, and comparing rates from several different lenders. Even a slight decrease in your mortgage rate can lead to huge savings over the life of your loan. However, make sure to compare the total borrowing costs and risks associated with different options when comparing mortgage types, determining your down payment, and deciding whether to purchase points.

Read the original article on Investopedia.