- Your mortgage interest rate is based in part on how risky lenders consider you to be as a borrower.
- The interest rate on your mortgage will help determine how much you pay each month.
- Improving your credit score and overall financial profile can help you get a lower rate.
For most Americans, buying a home means taking on a mortgage payment. And while the price of your house will play a big role in the size of that payment, your interest rate will, too.
Mortgage interest rates are influenced by a wide range of factors. Some are external, including the economy, Federal Reserve actions, and investment activity, and others are based on you, the borrower — things like your credit score and debts.
Want to know how to get the lowest mortgage rate possible? Use these strategies.
Improving your credit score
Raising your credit score is one way to get a lower interest rate on your mortgage.
The role of credit in mortgage rates
The impact of credit scores on mortgage rates is significant. Lenders use your credit to gauge how likely you are to make your mortgage payments on time.
A high credit score and a history of on-time bill payments tell the lender you're financially responsible, typically resulting in a lower interest rate. A lower score and late payments will mean the opposite (and could even prevent you from qualifying for a mortgage at all).
Tips for boosting your credit score
If your credit is not the best, work on paying your bills on time or set them on autopay. Payment history is the biggest factor in your credit score, so late payments can hurt your score considerably. You should also work to pay down any credit card and line-of-credit balances, as your total debts make up 30% of your score. Credit inquiries — which occur when you open new accounts — play a role, too, so take at least a six-month moratorium from applying for new accounts.
Shopping around for mortgage lenders
Not every lender offers the same rates, so you should shop around for the best mortgage lender with the lowest interest rates.
Comparing rates from different lenders
Just because you have your checking account at a bank down the road doesn't mean they offer the best mortgage rates. The internet makes it easy to quickly compare the best rates.
The importance of preapproval
To find out what lender is best for your situation, apply for mortgage preapproval with a few different banks and companies. They'll then give you a loan estimate, which will break down their rates and fees. You can use this to find the lowest-cost loan.
Understanding the types of mortgages
When it comes to interest rates, not all mortgages are created equal. Loans with longer terms typically have higher rates, while shorter-term loans — think 15-year loans, for example — have lower ones.
Fixed-rate vs. adjustable-rate mortgages
The type of rate you choose matters, too. Adjustable-rate mortgages — which have rates that can move upward or downward over time — often have lower rates than fixed-rate loans, at least at the start.
You sacrifice stability when you go with adjustable loans, though. Since your rate and payment can change later, you'll need to be sure your budget can accommodate a higher payment later on.
Choosing the right mortgage for a low interest rate
The loan program you choose factors in as well. Government-backed mortgages often have lower rates compared to conventional loans.
VA loans, a type of government-backed mortgage available only to veterans and active military members, tend to have the lowest interest rates among all loan types. FHA loans typically have low rates, too.
Making a larger down payment
Another strategy is to make a larger down payment. Saving up for a down payment can take a long time, but you don't necessarily need to have a full 20% down to reap the benefits of a larger down payment. Typically, borrowers need to put at least 3% down on a conventional loan. If you can bring more than that to the table, you may be rewarded with a slightly better rate.
How down payments affect interest rates
The larger your down payment, the more skin you have in the game — and the less money your lender has on the line if you fail to make your payments.
This makes you less of a risk in the eyes of the lender, and you'll likely be able to get a lower rate as a result.
Negotiating with lenders
In addition to comparing the rates lenders offer you, you can also negotiate with them.
Techniques for negotiating lower rates
There are several strategies for negotiating mortgage rates with lenders.
For instance, if one lender offers a lower rate or fewer fees than the others, use their loan estimate to negotiate. Ask lenders if they'd be able to match or even beat what the lowest-cost company is offering.
You can also ask lenders if they have any promotions you can take advantage of or if they'll buy down your rate. Some lenders offer this in competitive markets and will pay to reduce your interest rate for the first few years of the loan.
The role of mortgage points in reducing rates
If lenders won't budge, you can ask about buying points. These allow you to lower your interest rate by making a cash payment up front. Points can save you money in some cases, but the math doesn't always add up. Try out a mortgage calculator that supports points to decide if it's a good deal for you.
Locking in your rate
A rate lock lets you cement your interest rate while you finalize your home purchase. It can protect you from potential rate increases in the weeks leading up to closing, though it can also keep you from taking advantage of lower rates.
Timing your rate lock
It's important to time your rate lock properly — especially if you're in a falling-rate environment. If rates are rising week to week, locking sooner may help keep you from paying more on your loan. But if rates are dropping, you may want to hold out longer to snag a lower rate.
You can also ask your lender if they offer any float-down options. These let you pay a fee and reduce your rate, should market rates fall.
Monitoring market rates
You can work with your loan officer to monitor market rates and ensure you're timing your rate lock properly. Keep an eye on Business Insider's daily mortgage rate coverage to see how rates are trending.
Small savings on a big loan add up fast
The benefits of shopping around for mortgage rates are notable. For a savings account with a $1,000 balance, the difference of 0.25% on your interest rate isn't that big of a deal. But for a mortgage with a six-figure balance and 30-year payback period, a quarter of a percentage point can mean thousands — maybe tens of thousands — saved.
Check rates
FAQs
How much does one point lower your interest rate?
Buying one mortgage discount point typically reduces your interest rate by a quarter of a percentage point, though it can vary depending on your lender. A point costs 1% of your loan amount.
How can making a larger down payment help me get a lower interest rate?
A larger down payment reduces how much money the lender has on the line and makes you a lower-risk borrower. This can often qualify you for a lower interest rate.
Is it worth paying mortgage points for a lower interest rate?
Paying points can lower your interest rate, but it's important to know how long you'll be in the home before choosing to do so. If you'll be in the home long enough to reach the breakeven point — when the savings from your points outweigh their cost — then they can be a good idea to purchase.
What is the best way to negotiate a lower interest rate with lenders?
Ask directly for a lower rate, or present offers from other lenders and ask them to match or beat those. Having a strong credit profile and bringing a sizable down payment can also strengthen your negotiating position.
Will interest rates ever drop to 3% again?
Most experts don't believe mortgage interest rates will drop to 3% again. Anything is possible, but outside a major economic disruption like we had with the pandemic, it's unlikely rates will go this low again in the foreseeable future.
