10 Ways to Lower Your Mortgage Rate

By Alvaro Moreira
6 min read

Purchasing a home is probably the biggest investment you’ll ever make in your life. And if you don’t know about the various financing options available, the purchase could prove to be far more costly than you expected.

Managing the costs of owning a home starts with your mortgage loan and the interest rate attached to it. The lower the mortgage rate you get, the more you save over the course of the loan. 

mortgage rate

With That Being Said, Here Are The Top 10 Ways To Reduce Your Mortgage Rate

1. Build your credit score

Regardless of what type of loan you opt for – a conventional loan, VA loan, FHA loan, or some other type – your credit score will have a huge impact on your mortgage rate. Basically, the higher your credit score, the lower your mortgage rate. Your credit score reflects your creditworthiness.

A high credit score acts as proof that you are more likely to repay your loan. On the other hand, a lower credit score tells the lender that you are a riskier borrower, and thus the higher interest rate. Among the top things that loan officers check is your credit score. While it may not be a perfectly reliable system, it gives the lender a deeper insight into the borrower. 

The three prominent credit bureaus, namely Equifax, TransUnion, and Experian aren’t exactly open on how they calculate their scores.

Here Is A Brief Breakdown Of How Fico Credit Scores Are Calculated:

Your payment history (35%): Make sure to make your payments on time

Your credit utilization (30%): If you can, try not to use more than 20% of your available credit

Your length of credit history (15%): Do not close accounts you’ve had for a long time that are in good standing

New credit accounts (10%): Open new accounts only if necessary

Credit mix (10%): Lenders will want to be sure that you can handle different types of loans including personal loans and credit cards 

2. Have a long and consistent work history

Besides having a good credit score, it will also help to have a consistent and long-tenured work history. You are more likely to qualify for a mortgage loan with a more favorable rate if you’ve been working at the same place for years and have a consistent or rising annual income.

However, if you’ve recently switched jobs multiple times, lenders will be wary about qualifying you for a substantial loan since your income will be deemed as unreliable. The loan officer will confirm your employment status prior to you making an offer as well as before the closing date of your home purchase. Changing or quitting your job during the closing process can harm your chances of getting the loan. 

3. Compare rates from different lenders

This is perhaps the simplest yet most effective way of getting a lower-rate mortgage loan. You can easily compare mortgage rates online. Consider comparing different types of lenders including online banks, national banks, and local credit unions. Remember the lower your mortgage interest rate, the lower your monthly payment will be.

In general, credit unions are the best places to shop around since they tend to have lower fees than traditional banks. What’s more, they will pass some of these savings to you as a member. Credit unions are also more favorable to borrowers with less-than-stellar credit profiles. 

4. Try to negotiate for a better rate

Another good option is to ask your bank to lower your mortgage rate. After all, what’s the worst that can happen besides them saying no? If you are a good customer with an existing mortgage, more likely than not the lender will do everything to keep you in their client base. If you have a solid credit score, consider asking your lender to match a competitor’s interest rate.

If you’ve also managed to build up your credit score to a much higher level than when you applied for the loan, you can ask the lender to adjust your mortgage rate. Lenders highly value the business of people with exceptional credit scores. In some cases, they can go out of their way to acquire and retain the business of high-credit borrowers. 

5. Put more money down

The amount you put down on the house will have a huge impact on the mortgage interest rate you get. Mortgage loans exceeding $548,250 are classified as jumbo loans in most places across the country and are deemed to be riskier for the banks. In addition, they carry a higher interest rate. 

A smart move is to put down a high enough amount to lower the loan from the jumbo loan category. This way, you can essentially save thousands of dollars over the life of the loan. However, you need to be cautious since very small home loans tend to have high-interest rates. The key is to keep your loan amount above $100,000 to hit the sweet spot of mortgage interest rates. 

6. Pick a shorter loan term

Obviously, lenders appreciate it when borrowers repay loans quickly as this minimizes their risk. As a result, mortgage loans with a term shorter than the standard 30 years tend to enjoy lower rates. To get a lower mortgage rate, you can consider going for a 10-year or 15-year mortgage. With a lower rate, your loan balance will drop faster and you will start building equity in the home.

7. Consider the adjustable-rate vs. fixed-rate loan trade-off

Another way of reducing your mortgage rate is considering adjustable-rate vs. fixed-rate mortgages. In general, ARMs offer a lower rate for the first 5-7 years. With this in mind, if you have the ability to quickly pay off your loan, you may as well consider an adjustable-rate mortgage. 

However, you need to keep in mind that the rate for an ARM can adjust higher once this period lapses. If you are not properly prepared or if a large shift in mortgage interest rates occurs over a five- or seven-period, you can see a drastic increase in your monthly mortgage payments. 

In consideration of this, fixed-rate mortgages are a much safer option as they protect you from any disastrous fluctuations. This trade-off should be seriously considered. 

8. Purchase points

Also known as discount points, mortgage points are an upfront fee that you pay to the lender in exchange for reduced mortgage rates. One mortgage point is equal to 1% of the loan’s value. For example, one point on a $250,000 loan will cost you an extra $2,500, however, it will reduce your rate by 0.125% over the course of your loan. 

Points are an ideal option if you are planning on owning the home for a long time. They will save you money over a 15- or 30- year time frame.

9. Set up automatic mortgage payments

In some cases, it is the simplest steps that save you money. There are lenders out there who offer lower interest rates to customers who set up automatic mortgage payments. But remember, if you choose to change banks or close your account, your original lending bank may choose to remove the discounted interest rate applied for setting up an automatic mortgage payment. 

10. Refinance

Lastly, if you are a homeowner with an existing mortgage loan and are looking to lower your mortgage payment, you should seriously consider refinancing the mortgage. 

When refinancing, ensure to follow the above-mentioned suggestions to get the best refinance rates. A mortgage calculator can help you to determine whether refinancing, including refinancing fees are worth the cost.

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