How To Get The Best Mortgage Rate: 9 Tips

When you’re ready to buy a home, you’ll embark on a journey involving variables both inside and outside of your control.

Unlike the neighborhood you choose to live in or the style of house you pick, you won’t have full control over the mortgage interest rate that your lender assigns you. However, you can take steps to reduce your rate and the total amount of money you spend on a home purchase.

What Is A Mortgage Rate?

A mortgage rate is the interest rate applied to a mortgage loan, and it’s a percentage of the remaining loan amount you borrowed from a lender. It determines how much interest accrues on your loan and directly affects your monthly mortgage payment, which includes the principal loan balance, interest, taxes and insurance – sometimes collectively known as PITI. The higher your rate, the more interest you’ll pay over the life of the loan – increasing the total cost of your home.

Although external factors such as inflation and policies established by the Federal Reserve play a role in mortgage interest rates, there’s a lot you can do to influence the rate you ultimately land on.

9 Tips For Getting The Lowest Mortgage Rate

With mortgage rates, lower is better. So, how do you go about securing a low one? Here’s some advice on how to find the best mortgage rate.

Tip 1: Make A Larger Down Payment

Making a significant down payment on a house can help you secure a lower interest rate because it reduces the lender’s risk. A higher down payment lowers your loan-to-value ratio (LTV), making you a more attractive borrower and reducing the amount you need to borrow.

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.

The minimum down payment depends on the loan type. For most conventional loans (loans backed by a private lender rather than the federal government), you’ll need to put down at least 3% of the purchase price. An FHA loan, meanwhile, requires 3.5% down if your credit score is 580 or higher. VA loans and USDA loans – which, like FHA loans, are government-backed – offer a no-down-payment option.

Tip 2: Improve Your Credit Score

Your first active step toward homeownership should be carefully reviewing your credit report 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 fixed.

Then, you need to focus your attention on improving your credit score. Your credit score is probably the most important single factor in whether you’ll be mortgage-approved, and the loan amount and interest rate you’ll get if you are. That’s because your credit score helps lenders predict your future behavior as a borrower and the risk you present, based on how you’ve handled your debts in the past.

All lenders look at your credit score and credit 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 on your house, car, credit card and other recurring debts.

Minimum credit score requirements vary by loan program and lender, but the absolute lowest rates will usually go to borrowers who have a score of 760 or higher.

Tip 3: Build A Strong Employment Record

Lenders look for reliable borrowers, so you’ll be a more attractive candidate for a mortgage if you have a strong employment record. Plan to demonstrate at least 2 years of steady earnings, ideally from the same employer. You’ll also likely need documentation in the form of W-2s from the last 2 years and your two or three most recent pay stubs.

If you’re self-employed, you may still qualify for a good mortgage rate. However, you might need additional documentation such as tax returns and profit-and-loss statements. As for recent college graduates, they can verify employment with a job offer letter.

As for any gaps or irregularities you might have in your employment, they won’t necessarily disqualify you. But the more predictable your work history, the better.

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

Your debt-to-income ratio (DTI) is another important factor that lenders use to evaluate your ability to repay the loan. If you’re already carrying a heavy debt load, a lender might conclude that adding a new mortgage to the mix will make your financial situation unsustainable. Or they may approve you for a mortgage but stick you with a higher interest rate to mitigate their lending risk.

Suppose you make $5,000 a month and put a total of $2,000 toward student loans and car payments. In this case, your DTI would be 40%. The lower your DTI, the less risky you’ll appear to the lender – and the lower your rate will likely be.

So how do you reduce your DTI? One way is to make more money. Another way is to pay off certain debts (although you shouldn’t close every debt account). Eliminating debt will also free up more money to spend on a monthly mortgage payment.

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

One of the most important choices you’ll make when buying a house is the choice between a fixed-rate mortgage and an ARM.

Fixed-Rate Mortgages

With a fixed-rate mortgage, your interest rate stays the same over the loan repayment term even when market interest rates inevitably fluctuate. With a fixed-rate mortgage, you’ll almost always have a higher rate than you start out with on an adjustable-rate mortgage. That’s because lenders want to recoup some of their losses if market interest rates rise later on in your repayment term.

Adjustable-Rate Mortgages (ARMs)

The lower interest rate you’ll likely have at first with an adjustable-rate mortgage (ARM) will remain fixed for an initial period that typically runs 5, 7 or 10 years. After this period, the rate will periodically adjust up or down based on market conditions.

With an ARM, you accept the risk of your interest rate rising significantly at some point, so lenders compensate by offering a lower introductory rate that will attract prospective home buyers. If your rate increases, though, you may end up ultimately paying more in interest than you would with a higher initial rate that was fixed.

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., a single point is $1,000 on a loan amount of $100,000).

You can purchase points in increments down to 0.125 points.

While prepaying interest will get you a lower rate, the tradeoff is that you have to stay in the home long enough to reach a position where you save money. For example, if buying two points on a $250,000 mortgage (two points equals $5,000) saved you $300 a 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, however, buying mortgage points can be a good way to save money.

Tip 7: Choose A Shorter Loan Repayment Term

Opting for a 15-year loan repayment term instead of a 30-year term can save you a lot of money over the life of your loan. That’s in part because you’ll have a lower interest rate since lenders see a 15-year repayment term as posing less risk to them.

With a 15-year term, you’ll also reach 20% home equity faster (assuming you didn’t make a down payment of 20% or higher), which allows you to stop paying PMI sooner. You’ll also pay off your mortgage sooner, opening up more money in your monthly budget.

The downside of a 15-year mortgage is that the monthly payment is significantly higher than it is for a 30-year loan because you’ve committed to paying back the loan in half the amount of time. So, before going with the 15-year option, ensure you can afford the higher monthly payments. Consider using a mortgage calculator to compare monthly payments for a repayment term of both 15 and 30 years. 

Tip 8: Compare Offers From Lenders

To get the best mortgage rate possible, it’s wise not to necessarily settle for the first offer you receive. The best mortgage lenders may not always offer the lowest interest rate. You’ll want to also compare closing costs, mortgage insurance and any prepayment penalties, for example. Then, choose the offer that’s the most favorable overall.

Before selecting an offer, though, ask about potential discounts, credits or programs that could reduce costs. State and local governments may offer down payment assistance or reduced-rate mortgages for first-time home buyers. Some banks and credit unions might provide discounts if you already have accounts with them.

Tip 9: Watch And Wait

Keep an eye on interest rates and the housing market while you’re preparing to apply for a mortgage. When possible, act when interest rates are lower, or at least before they get any higher.

Once you find a mortgage rate that works for you, it’s usually a good idea not to delay. The closing process can take several weeks, and rates will likely fluctuate during this time.

Once you’ve signed the home purchase agreement and secured the loan, you may opt to ask the lender to lock in the rate. Doing so often incurs an additional fee, but it may be worth it for added security and peace of mind.

Other Factors Affecting Your Mortgage Rate

Here are a couple of other factors that may affect the interest rate you get on your mortgage.

Current Market Interest Rates

Current economic conditions, the pandemic and geopolitical conflicts have driven mortgage rates high compared to a few years ago.

A “good” interest rate can simply mean a low rate relative to current market rates. You can get a sense of how reasonable your rate is by looking up today’s average mortgage rates in the U.S.

Type Of Loan

Beyond choosing between a fixed-rate and an adjustable-rate mortgage, you’ll have to select a type of mortgage for your home purchase. Certain loan programs are more likely than others to have a relatively high interest rate.

Here’s how interest rates typically stack up for all of the major mortgage loan programs:

• Conventional conforming loans (all conventional loans that aren’t jumbo loans) often have high rates relative to the rates on some government-backed loans. That said, you can still reduce your rate with a high credit score and large down payment.
• FHA loans are often easier to qualify for than other mortgage options. You can have a lower credit score and higher DTI and still qualify, in many cases. Your mortgage rate might be higher than it would be with other government-backed loans, but it should be competitive with conventional loan rates.
• VA loans are for qualifying veterans, active-duty service members, members of the National Guard and Reserve forces, and surviving spouses. Mortgage rates on VA loans are often slightly lower than those with other loan programs. Be aware that because no down payment is required for these loans, the total loan amount be higher.
• USDA mortgages may have modestly low interest rates, but you must live in a rural area to qualify for this type of mortgage. Rocket Mortgage® doesn’t currently offer USDA loans.
• Jumbo loans are riskier for lenders, so borrowers may face a higher interest rate than they’d get with another loan program. But depending on market conditions, you could have a jumbo loan with a competitive rate or even a lower-than-average rate.

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 a huge savings. For example, let’s say you plan on taking out a $300,000 home loan. For purposes of the examples below, we’re not factoring in property taxes, homeowners insurance and possible mortgage insurance.

Should You Wait For Lower Mortgage Rates?

You can’t time the market, so most real estate professionals recommend against waiting for mortgage rates to go down if you’re ready to buy a house. Lower interest rates could be on the horizon, but there’s no guarantee. Even if rates fall, they’ll likely bring with them more competition and higher home prices, which could result in you paying more for a home.

The Bottom Line: Getting The Best Rate Available Requires Preparation

Understanding how different factors influence mortgage rates can help you prepare to secure the best rate possible. From paying down debt to raising your credit score to going with a shorter loan repayment term, you can take several steps to lower your interest rate. Securing a lower mortgage rate sets you up for lower monthly payments now and greater savings in the long run.

Getting ready to buy your next home? Begin the approval process today with Rocket Mortgage^® and lock into your rate today.