How to get a lower mortgage rate

If you’re interested in learning how to get a lower mortgage rate, it might be worth going back to mortgage basics. This means brushing up on fundamentals like effective mortgage shopping, refinancing and ways to improve your financial profile for lenders. Let’s explore how you can improve your mortgage options and possibly secure a lower mortgage rate.

7 tips to get a better mortgage rate

Here are seven ways you may be able to lower your interest rate and reduce mortgage payments, both at signing and during your loan term.

1. Shopping for mortgage rates

When looking for a mortgage, it might be helpful to shop around with different lenders to get the best rate for you. Mortgage brokers, regional banks, national banks and local credit unions tend to offer distinct loan products, each with their own rates and fees. Some lenders cater to new homeowners, while others focus on refinancing. Comparing your choices and considering your personal financial situation might help to identify lenders and mortgage options that better align with your goals.

Your real estate agent might have suggestions too, though doing your own research is still generally helpful. Because loan rates can change frequently, mortgage shopping within a shorter period might make comparison more effective. Remember to factor in any associated fees when calculating mortgage rates.

2. Improving your credit score

To a lender, your credit score is indicative of your risk as a customer — the lower the score, the higher the perceived risk. That's why some lenders may charge higher interest rates to applicants with lower credit scores. Even if you already have a loan, improving your credit score may qualify you for better rates with a mortgage refinance.

Homeowners and homebuyers looking to build good credit will often review their credit report to check for any outstanding balances. Clearing debt and staying consistent with timely debt repayments is key to improving credit over time. It’s also generally a good practice to routinely look for and correct any errors on your credit report, as these can negatively impact your credit. While higher scores are generally helpful for securing lower mortgage rates, there are some affordable lending programs designed to make borrowing more accessible to those with lower credit scores.

3. Considering your loan term

Lenders tend to consider short-term home loans less risky, since they’ll recoup their money faster. As a result, shorter loan terms, such as a 15-year mortgage, often carry lower interest rates. However, since you have to pay off the principal in a shorter time, these loans typically have a larger monthly payment.

Despite the higher payments, short-term home loans can save you more money in the long run when you pay less interest overall. But long-term loans may leave you with more disposable income every month because you’re splitting up your principal over more total payments. If you're looking specifically for low-interest mortgage rates and increased savings over the life of your loan, a short-term loan might be your best bet.

4. Making a larger down payment

Making a larger down payment means more equity in your home from the start. Not only will it reduce the loan principal, you'll also pay less interest over the loan’s lifetime since interest is calculated on the principal owed. First-time homebuyers exploring ways to save for their first home might also qualify for down payment assistance from certain government programs.

5. Buying mortgage discount points

If you plan on owning your home for a long time, buying mortgage discount points might be a way to save money. Paid for at closing, each mortgage point typically has a value equal to one percent of your mortgage. In exchange for these upfront payments, your lender reduces the interest rate on your mortgage. The exact reduction generally depends on the lender’s terms and current market conditions.

However, it’s generally recommended to consider how long it will take to recoup your savings. Known as the break-even point, this is the length of time it will take for your total savings to add up to the cost of the discount points. If this time is longer than you plan to own the home, mortgage discount points may not be worth it for you.

6. Locking in your mortgage rate

To potentially reduce the impact of mortgage rate changes before you close on your home loan, you may want to consider locking in your interest rate. A mortgage rate lock fixes the proposed rate until closing on your mortgage, preventing it from fluctuations in the interim. You may need to pay a fee to lock in a rate, but it could be worth it if you suspect rates may change.

Keep in mind that while rate lock protects you from rising mortgage rates, it also rules out an opportunity to secure a lower mortgage rate. It might be worth speaking to your lender about rate locks with float-down provisions. The float-down feature gives you a one-time opportunity to lower your locked-in rate to current market rates. There may be additional fees for this option.

7. Refinancing your mortgage

Refinancingrefinance-hl000061 is, essentially, replacing your existing mortgage loan with a new one that has different rates or terms. There are a variety of refinancing options available, each with its own pros and cons. Here’s how refinancing might save you money on your mortgage rate:

• If you're concerned about an impending increase in your adjustable-rate mortgage (ARM), consider refinancing your loan to a fixed-rate mortgage. This allows you to make consistent monthly principal and interest payments.
• You may also be able to change your existing ARM to another ARM with different terms. The Federal Reserve Board recommends looking at ARMs with low interest-rate caps. These limits prevent your mortgage payments from increasing past a certain amount.
• If you're in a better financial situation than you were when you first signed your loan, you could potentially negotiate your fixed-rate mortgage to a lower interest rate. This option is particularly relevant for people whose credit scores have increased or if overall lending rates have decreased. When refinancing a fixed-rate mortgage, you may also be able to renegotiate the length of your loan to better suit your needs.

In summary

Many homeowners and homebuyers are eager to learn how to get the lowest mortgage rate. Financial strategies such as refinancing, making larger down payments, buying mortgage discount points or securing mortgage rate locks may be ways of lowering rates. Additionally, trying to improve your financial profile with better credit and lower debt can also help you qualify for better mortgage options. If you’re curious to learn more ways to get better mortgage rates, consider speaking with a qualified home lending professional today.