A mortgage interest rate determines how much you will pay the bank for borrowing money over 15 or 30 years. Even a tiny difference of 0.5% in your interest rate can save you tens of thousands of dollars over the lifetime of a home loan. Securing the lowest possible rate is the key to minimizing your monthly payments and overall debt.
Five Strategies to Secure a Lower Interest Rate
While macro-economic factors set the baseline interest rates, you can take control of your financial profile to ensure you get the absolute best rate lenders can offer:
1. Improve Your Credit Score
Lenders reserve their lowest interest rates for borrowers with excellent credit scores (740 and above). If your credit score is in the mid-600s, you could pay up to a full percentage point more in interest. Before applying for a mortgage, check your credit report, pay down outstanding credit card balances, and avoid opening new credit lines.
2. Increase Your Down Payment
If you can afford to pay more cash upfront, lenders will view your loan as less risky. Putting down 20% or more helps you secure a lower rate and eliminates the need for Private Mortgage Insurance (PMI), saving you money twice over.
3. Purchase Discount Points
Discount points are fees you pay directly to the lender at closing in exchange for a reduced interest rate. One point typically costs 1% of your total loan amount and lowers your interest rate by 0.25%. Use a calculator to see if your monthly savings will offset the upfront cost before you sell or refinance the home.
"Buying points is an investment: if you plan to stay in the home for a long time, the interest savings will far outweigh the upfront cost."
4. Opt for a Shorter Loan Term
15-year fixed-rate mortgages consistently offer lower interest rates than 30-year mortgages—often by 0.5% to 0.75%. Although your monthly payment will be higher because you are repaying the principal faster, you will pay far less interest over the life of the loan.
5. Shop Around and Compare Offers
Interest rates vary widely from lender to lender. Get quotes from at least three different institutions—including local credit unions, major retail banks, and online mortgage brokers. Use these loan estimates to negotiate lower rates or fees with your preferred lender.