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10 Tips For How To Get The Best Mortgage Rate Available

Andrew Dehan10-minute read

August 19, 2022

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When you’re ready to buy a home, you’ll be entering a process that you may have only been vaguely aware of previously. You may have known that interest rates were at historic lows just a few years ago, but you weren’t ready to buy a house then. Now that you are, rates are changing and the rates your friends secured then are simply no longer being offered.

Still, there are steps you can take to get the best rate possible at any time. We’ll give you our best advice for how to get the lowest possible mortgage rate right now, no matter when you’re applying for a mortgage loan.

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What Is A Mortgage Rate?

For most home buyers embarking on their journey to buy a house, they’ll first need to get a mortgage loan. Lenders make these loans in return for your interest payments. Your mortgage interest rate is applied to the amount of the loan, and your monthly mortgage payment is made up of principal, interest, taxes and insurance – collectively known as PITI.

Mortgage rates determine how much interest accrues on your home loan. The higher your rate, the more interest you'll pay and the more you'll end up paying for your house in total.

How Much Can I Save By Getting A Lower Interest Rate?

It may not seem like much, but lowering your mortgage interest rate by as little 0.25% can translate into huge savings.. For example, let’s say you plan on taking out a $300,000 home loan. For our purposes, we’re ignoring PMI, taxes and homeowners insurance.

Mortgage Rate

Monthly payment:

15-year fixed-rate loan

Monthly payment: 30-year loan

Overall cost of 15-year mortgage

Overall cost of  30-year mortgage

6%

$2,531.57

$1,798.65

$455,682.69

$647,514.57

5.75%

$2,491.23

$1,750.72

$448,421.45

$630,258.68

5.5%

$2,451.25

$1,703.37

$441,225.07

$613,212.12

5.25%

$2,411.63

$1,656.61

$434,093.97

$596,380.00

5%

$2,372.38

$1,610.46

$427,028.56

$579,767.35

 

10 Tips For How To Get The Best Mortgage Rate

With mortgage rates, lower is better. So, how do you go about securing a low one? There are a few strategies you can employ to get the best mortgage rate possible.

Tip 1: Start Saving For A Bigger Down Payment

If settling down in your own home is your dream, the earlier you start saving for a down payment, the better.

How much down payment will you need? It will depend on the type of loan you choose. For a conventional loan, you’ll need at least 3%, while an FHA loan requires a 3.5% down payment. You can get a no-down-payment mortgage if you’re able to take advantage of a VA loan or USDA loan.

Many home buyers new to the market are under the misconception that you need a 20% down payment for a conventional loan. That’s not the case. The 20% figure came from the private mortgage insurance (PMI) requirement on conventional mortgages: If your down payment is less than 20%, you’ll need to pay PMI premiums until you reach that threshold of home equity.

Accumulating more assets will help you get a better mortgage rate. Assets are things not related to your annual income that could be used to help pay off your mortgage. This could be proceeds from the sale of property, stocks, bonds, mutual funds or other investments.

The more assets you have, the greater your ability to repay your mortgage and the lower your interest rate will be.

Tip 2: Check Your Credit Score And Report For Errors And Problems

Your first active step toward homeownership should be to get your credit report and proofread it carefully to identify errors and get them corrected. This process can take a while, so it’s important to start early and be persistent about getting mistakes corrected.

Tip 3: Work On Improving Your Credit Score

Your credit score is probably the most important single factor in determining whether you’ll be approved and if so, for how much and at what interest rate. Interest rates reflect factors beyond your control, so the best you’ll be able to do is get the lowest rates available.

But interest rates also reflect your lender’s assessment of the risk you present as a borrower. Your credit score helps lenders predict your future behavior as a borrower based on how you’ve handled your debts in the past.

All lenders look at your credit score and history to determine your mortgage eligibility. In general, the higher your credit score, the lower your rate. You keep your credit score up by making timely payments for your house, car, credit card and so on.

Tip 4: Reduce Your Debt-To-Income Ratio By Paying Off Debt

Your debt-to-income ratio is another important factor that lenders consider to evaluate your ability to repay the loan. If you are carrying a heavy debt load, your lender might find your financial situation unsustainable, and therefore set a higher rate to compensate them for being willing to take the risk.

Let’s say you make $5,000 a month and you pay $1,250 of that toward your student loans, house and car payments. Your DTI is 25%. The lower this ratio is, the less risky you look for the lender – and your rate will be lower.

While you don’t want to close every account, it can be helpful to pay off certain debts. This can help decrease your DTI and free up more money to spend toward your monthly mortgage payment. Less debt can mean a lower mortgage rate.

Should you save for your down payment or pay down debt? It’s important to find the right balance between the two. Lenders don’t expect you to be completely debt-free. Some debts are considered “good debt” by lenders, particularly student loans and reasonable car loans when reliable transportation is necessary for work.

Other debts, like revolving credit card debts, are frowned upon by lenders. High credit card balances are often a sign that borrowers are using credit to supplement their income instead of living within their means.

Tip 5: Choose Between A Fixed-Rate And Adjustable Rate Mortgage (ARM)

You’ll have to make several decisions when it comes to choosing among the types of mortgage available when you are planning to buy a house. From a financial perspective, one of the single most important choices you’ll make is between a fixed-rate mortgage or adjustable-rate mortgage (ARM).

Fixed Rate Mortgages

With a fixed-rate mortgage, the amount of your payment will stay the same over the loan term. That means your lender is making a very large loan to you whose terms can’t be changed for the next 15 – 30 years. Even if interest rates skyrocket, your fixed-term loan payments won’t change.

Because lenders are taking all of the risk that interest rates will rise when they make a fixed-rate mortgage loan, they charge more upfront. There’s a big difference between 15- and 30-year fixed rates as well, which reflects that lenders are assuming that risk for twice as long.

Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages (ARMs) work a bit differently. They typically start with a lower rate. This teaser rate remains fixed for the first several years of the loan – typically a period of 5, 7 or 10 years. After that, the rate will periodically adjust up or down according to the market.

Because you can end up paying much more in interest rates, you are sharing with your lender the risk that interest rates will go up. That’s why they can afford to offer the introductory rate to entice new home buyers.

Fixed-Rate Vs. ARMs: Which Is Better?

As usual, the answer depends. Had you asked during the early years of the COVID-19 pandemic, the answer would have likely been to lock into a fixed rate because mortgage rates were at historic lows. Now, interest rates are on the rise, and ARMs are becoming increasingly popular once more.

If you’re not planning to stay in your new home for longer than the introductory period, or you’re comfortable refinancing your mortgage before the teaser rate expires, an ARM might be your best choice. Be aware, however, that if you don’t sell or refinance, ARMs are much more expensive for home buyers over the life of the loan.

Tip 6: Consider Prepaid Mortgage Points

You can buy your rate down by prepaying interest at closing. This prepaid interest comes in the form of mortgage points, or discount points. One point is equal to 1% of the loan amount (e.g., on a loan amount of $100,000, a single point is $1,000). You can purchase points in increments down to 0.125 points. Many of the interest rates you see advertised have a certain number of points attached to them.

Prepaying this interest will get you a lower rate. The trade-off here is that you have to stay in the home long enough to reach a position where you save money. If buying two points on a $250,000 mortgage (two points equals $5,000) saved you $300 per month on your mortgage payment, you’d have to stay in the home for 17 months to break even. If you plan on staying in the house for several years, buying mortgage points can be a good way to save money.

Tip 7: Choose A Shorter Loan Term

You can save a lot of money over the life of your loan if you choose a 15 year instead of a 30-year repayment term. By shortening your loan term, you can also get a lower interest rate upfront. As we discussed previously, it’s far less risky to predict repayment 15 years out than it is to predict 30 years out. You’ll also build home equity much faster, which reduces your loan-to-value ratio and lender risk.

Among the added benefits of a 15-year repayment term is that you’ll reach the 20% home equity mark, meaning you can stop PMI sooner. You’ll also pay off your mortgage loan sooner, removing a huge chunk of your monthly budget.

However, the monthly mortgage payment on a 15-year loan is significantly higher than that of a 30-year mortgage, and the pandemic housing market has put purchase prices out of reach for many, so it's most important to be sure that you can afford your monthly mortgage payment.

Use our mortgage calculator to determine your monthly mortgage payment with both repayment terms.

Although your monthly payment will be higher on a 15-year loan, you could potentially save tens of thousands in interest over the life of the loan. Not only will you lower your interest rate, but you’ll pay more toward your mortgage balance faster than you would on a traditional 30-year loan.

Tip 8: Make A Higher Down Payment

A higher down payment at closing will get home buyers a lower rate. Putting down a significant portion of the purchase price lowers the relative risk for a lender. The lower your loan-to-value ratio (LTV), the more you’re considered a good investment. The higher your down payment, the less a lender has to give you so you can afford the home.

Keep in mind, though, that using all your cash for a down payment leaves you vulnerable should some unforeseen circumstances arise. Lenders like to see you have reserve funds to cover up to three months of expenses, just in case.

Tip 9: Raise Your Income

It sounds simplistic, but realizing the road ahead is very expensive can focus your mind on maximizing income. This can be as simple as asking for a raise, looking for a higher paying job, completing educational requirements or starting a side hustle. Whichever route you choose, increasing your income before you buy will ease the budgetary burden of homeownership.

Tip 10: Watch And Wait

Keep an eye on interest rates and the housing market while you’re preparing to apply for a mortgage. Although it’s not advised that you attempt to “time the market” – waiting for a perfect moment – it does make sense to act when interest rates are lower, or at least before they get any higher.

Today's Mortgage Rates

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Rate / APR

Pricing is currently not available for the selected value.

Other Factors Affecting Your Mortgage Rate

Let’s go over the factors that may affect what interest rate you can get on your mortgage.

Current Market Interest Rates

There are many economic factors that affect interest rates in the broader borrowing marketplace. Current economic conditions, the pandemic and geopolitical conflicts have driven rates up.

A “good” interest rate can mean a rate that is low relative to the current market. You can get a sense for this by looking at today's mortgage rates and seeing what typical rates look like right now.

If you're curious, you can also take a look at historical mortgage rates to see how much interest rates have changed over the years. What was good in the 1970s, for example, is going to be very different from what is considered good now.

Type Of Loan

Beyond choosing between fixed-rate or adjustable rate mortgages, you’ll have to select a type of mortgage for your home purchase.

Certain loans are more likely to have higher rates. Generally, lower qualifications mean a higher rate.

Let's take a look at a few different classes of home loans:

  • Conventional loans typically have lower interest rates because they usually have higher credit score and down payment expectations.
  • FHA mortgages are easier to qualify for. You can have a lower credit score and higher debt-to-income ratio (DTI). Your mortgage rate might be higher than for other government-backed loans, but it should be competitive with conventional loan rates.
  • VA mortgages are for qualifying veterans and surviving spouses. Mortgage rates on VA loans may be slightly lower.
  • USDA mortgages may have lower interest rates, but you must live in a rural area to qualify for one.
  • Jumbo loans are riskier for lenders, so they can have higher interest rates. Depending on market conditions, you could have a jumbo loan with a competitive rate or even a lower-than-average rate.

Whether your loan is fixed-rate, adjustable or variable will also naturally affect your mortgage rate.

Primary Vs. Second Mortgages

Your mortgage rate will also be affected if you take out a second mortgage. Some homeowners take out a second mortgage to access their home equity, or the amount of the home they own. Because your first mortgage takes priority, your primary mortgage will be paid off first if you run into financial trouble.

Due to the increased risk associated with these loans, second mortgages have slightly higher rates than primary ones. By contrast, in a cash-out refinance, you take out equity based on your primary mortgage and you can get a lower rate. In addition, you can roll your second mortgage into your refinanced primary mortgage.

Primary Residence Vs. Second Home Vs. Investment Property

Interest rates are all about risk. When you buy a house, you know what you can afford and plan to make the payments. If you fall on hard times, however, you’re likely to pay off certain expenses before others.

Interest rates are higher for second homes and investment properties because if something were to go wrong, you’d likely make the payment on your primary residence first.

Interest rates are also different based on whether it’s a single-family property or a multi-unit complex like condos.

The Bottom Line: Getting The Best Rate Available Is A Matter Of Preparation

Understanding how external and personal factors influence mortgage rates helps you prepare so you can get the best rate possible. There are also a few steps you can take to lower your interest rate – from paying off debt to shortening your loan term. Securing a lower mortgage rate sets you up for lower monthly payments and greater savings in the long run.

Getting ready to buy your next home? Apply for approval online now and lock into your rate before interest rates rise again.

Take the first step towards the right mortgage

Rocket Mortgage helps you get started wherever you are in your journey.

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.