How to get a lower mortgage rate
Quick insights
- Shopping, improving credit and certain financial strategies may help you get a lower mortgage rate.
- Lower mortgage rates are important because they reduce monthly payments and total interest paid over the loan’s life.
- Consult lending professionals for personalized guidance and explore refinancing, down payments or rate locks to potentially lower your mortgage rate.
If you’re interested in learning how to get a lower mortgage rate, it may help to revisit some mortgage basics. This includes brushing up on fundamentals like effective mortgage shopping, refinancing options and ways to strengthen your financial profile for lenders. Let’s explore how you can improve your mortgage options and possibly secure a lower mortgage rate.
9 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, shopping around with different lenders may help you find the best rate for your situation. Mortgage brokers, regional banks, national banks and local credit unions tend to offer distinct loan products, each with their own rates, fees and eligibility requirements. Some lenders specialize in helping first-time homeowners while others focus on refinancing. Comparing your choices and considering your personal financial situation may help to identify lenders and mortgage products that align with your goals.
Your real estate agent might also have suggestions, though doing your own research is generally beneficial. Because loan rates can change frequently, comparing lenders within a short time frame may be more effective. Remember to factor in any associated fees when calculating mortgage rates and evaluating your offers.
2. Improving your credit score
To a lender, your credit score is indicative of your risk as a borrower. Generally, a lower score may signal higher risk, which can lead some mortgage lenders to offer higher interest rates. 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. Building a strong employment record
Lenders assess a borrower’s employment record as part of the mortgage approval process. Stable and sufficient income demonstrates an ability to repay the loan. However, income alone is not what lenders review.
Here are the aspects of employment lenders could evaluate:
- Work history: Lenders may prefer borrowers who have maintained steady employment, typically in the same job or industry. Frequent job changes or gaps in employment may raise concerns about income reliability. If a borrower recently changed jobs, lenders may require additional documentation to confirm the new position is permanent and income is stable.
- Proof of income: Lenders require documentation such as recent pay stubs, W-2 forms, and tax returns to verify income. For self-employed borrowers, profit and loss statements and tax returns are needed. The borrower’s income must be adequate to cover the mortgage payments and other debts, typically measured by the debt-to-income (DTI) ratio.
- Type of employment: Full-time, permanent positions generally look better than part-time, temporary, or contract work. Self-employed individuals may need to provide additional documentation.
- Promotions or raises: Positive changes, such as promotions, can strengthen a borrower’s application if they result in higher, stable income. Higher-level or skilled positions may indicate greater job security or earning potential.
4. Considering your loan term
Lenders often view 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, may come with lower interest rates. However, because you pay off the principal in a shorter time, these loans typically have a larger monthly payment.
Despite the higher payments, short-term mortgages can save you money over the life of the loan because you pay less interest overall. Longer-term loans may offer lower monthly payments, giving you more disposable income each month. If you’re looking specifically for low-interest mortgage rates and increased savings over the life of your loan, a short-term loan is one option to consider.
5. Making a larger down payment
Making a larger down payment means you have more equity in your home from the start. A lower loan will also accrue less interest over time because it is charged on the principal. First-time homebuyers exploring ways to save for their first home might qualify for down payment assistance from certain government programs.
6. Understanding and reducing debt-to-income (DTI) ratio
DTI ratio measures the percentage of your gross monthly income that goes toward paying monthly debt. To calculate DTI, divide your total monthly debt payments by your gross monthly income, then multiply that number by 100.
Example: Your monthly debts (credit cards, car loans, student loans, proposed mortgage payment) total $2,000, and your gross monthly income is $5,000. Your DTI is 40% (2,000 / 5,000 x 100).
DTI matters for mortgage approval because lenders use the figure to assess your ability to manage monthly mortgage payments. Lower DTI generally makes for a less risky borrower. Reducing your DTI ratio shows lenders you can comfortably manage debt. This may improve your approval chances and expand your loan options. More specifically, reducing your DTI by paying off debt or increasing your income can help you secure better loan terms, such as a lower mortgage interest rate.
7. 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. Each mortgage point is paid for at closing and typically equals one percent of your mortgage amount. 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.
Example: Let’s say that you qualify for a $400,000 home loan with a 7% interest rate. Buying one mortgage point may be $4,000, and that would lower your rate to 6.75%.
8. 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.
9. Refinancing your mortgage
Refinancing is essentially replacing your existing mortgage loan with a new one that has a different rate or different terms. 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.
To potentially refinance your mortgage or learn more about your options, visit our refinancing page. There may be a variety of refinancing options available to you, each with its own pros and cons.
How much could you save with a lower mortgage rate?
A lower interest rate means lower monthly payments and less money paid in interest over time. Here’s an example showing how different mortgage rates affect your monthly payment and the total cost of a loan.
Sample scenario:
- Loan Amount: $300,000
- Loan Term: 30 years (360 months)
- Type: Fixed-rate mortgage
Approximate costs:
- 7% = $1,995 monthly payment and total cost of $718,200 over 30 years
- 6% = $1,800 monthly payment and total cost of $647,640 over 30 years
- 5% = $1,610 monthly payment and total cost of $579,600 over 30 years
- 4% = $1,430 monthly payment and total cost of $515,520 over 30 years
These calculations include only principal and interest. They don’t account for other expenses like homeowner’s insurance, PMI or property taxes, which can increase monthly costs of homeownership.
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 help get better mortgage rates, consider speaking with a qualified home lending professional today.
