If you're a homeowner with a mortgage, you likely understand the importance of securing a low interest rate. A lower interest rate means you'll pay less in interest over the life of your loan, resulting in significant savings over time. But how do you go about getting a lower interest rate on your mortgage? Here are some tips to help you secure a better rate:
1. Improve your credit score.
Your credit score is one of the most important factors in determining your mortgage interest rate. A higher credit score typically means a lower interest rate, so it's important to take steps to improve your score before applying for a mortgage. Establishing two or more credit tradelines, paying your bills on time, keeping your credit card balances low, and limiting new credit applications are all ways to boost your score.
2. Increase your down payment.
Another way to secure a lower interest rate is to increase your down payment. The more money you put down upfront, the less you'll need to borrow, which can lead to a lower interest rate. Additionally, a larger down payment can help you avoid paying private mortgage insurance (PMI), which can add to increases your monthly mortgage payment.
3. Shop around for the best rate.
Don't assume that your current lender is offering you the best rate. It's always a good idea to shop around and compare rates from multiple lenders to ensure you're getting the best deal. Keep in mind that the interest rate isn't the only factor to consider when choosing a lender. You'll also want to consider the fees and closing costs associated with each loan.
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4. Consider a shorter loan term.
While a 30-year mortgage is the most common type of loan, it's not always the best option for everyone. Shorter loan terms, such as 15 or 20 years, typically come with lower interest rates. While your monthly payment will be higher, you'll save money in interest over the life of the loan.
5. Pay points upfront.
Paying points, also known as discount points, is another way to lower your mortgage interest rate. One point typically costs 1% of the loan amount and can lower your interest rate by 0.25% to 0.5%. While paying points can be a good option if you plan to stay in your home for a long time, it's not always the best choice for everyone. Be sure to weigh the upfront cost of points against the savings you'll see in interest over time.
6. Look into a mortgage buydown product.
Ask your lender about temporary buydown options. A temporary buydown is where the seller or builder pays an upfront fee to reduce your interest rate for the first few years of the mortgage term. For example, a 2-1 buydown would reduce your interest rate by 2% in the first year of the mortgage, 1% in the second year, and then revert to the original interest rate for the remaining years. A permanent buydown is where you, the borrower, pays an upfront fee to permanently reduce your interest rate for the entire mortgage term.
7. Consider refinancing.
If you already have a mortgage with a high interest rate, refinancing may be a good option to secure a lower rate. Refinancing involves taking out a new mortgage to pay off your existing one, often with a lower interest rate. Keep in mind that refinancing comes with closing costs and fees, so you'll want to make sure the savings you'll see in interest outweigh these costs.
Although securing a lower interest rate on your mortgage takes some effort, the savings can be well worth it in the long run. By improving your credit score, increasing your down payment, shopping around, considering a shorter loan term, paying points, and refinancing, you can take steps to secure a better rate and save money over the life of your loan.
A little preparation goes a long way when you need financing for a new home.
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