9 tips for getting the best mortgage rate

When you get a mortgage, its interest rate is one of the most important things to look at. Interest is the cost of borrowing money. The higher the rate, the more interest accrues and the more you’ll have to pay for your mortgage each month and overall.

While some factors that influence your mortgage rate are out of your control, there are many things that you can do to try to secure a lower interest rate.

If you’re in the market for a new home loan, use these tips to get the best deal possible. It could help you save tens or hundreds of thousands of dollars over the life of your loan.

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

A big part of how lenders set interest rates is how risky they think a loan is. The more your lender is convinced that you’ll pay back your loan, the lower the interest rate you may be able to get.

Use these tips to help get the lowest mortgage rate possible.

Tip 1: Make a larger down payment

When you buy a home, you usually have to put down a portion of the home’s price up front. This is called the down payment.

The larger the down payment you make, the less risk the lender has to take on when approving your loan. This is because a larger down payment both reduces the amount the lender has to lend you and lowers the loan-to-value ratio. Larger down payments can help you get a lower mortgage rate and may also help you avoid other costs like private mortgage insurance.

Different types of loans have different down payment requirements. For example, FHA loans have a minimum down payment of 3.5% while VA and USDA loans have no down payment required.

Keep in mind that a larger down payment does have some downsides. It can be hard to save that much, and you don’t want to pay too much up front and deplete your emergency savings. During the underwriting process, your lender will want to see that you can afford the down payment you’re offering and still have funds set aside for emergencies.

Tip 2: Improve your credit score

Your credit score is a numerical indication of how good you are at handling debt. The higher your score, the better you look to lenders, so higher scores can help you land a lower rate.

To keep your credit score in good shape, make sure you always make your monthly loan payments on time and check your credit report to get any errors removed.

Different loan programs have different minimum score requirements. Conventional loans require a score of 620, while FHA loans require a minimum score of 500. Ideally, you want to be well above the minimum to get a good rate.

Tip 3: Build a strong employment record

When you apply for a loan, you’ll need to give your lender a lot of paperwork and documents that it can use to look into your financial situation. Some key documents will relate to your job and income. Expect to provide tax returns, pay stubs, and bank statements, among other things. Try to have these ready before you apply.

If you can show your lender that you have a consistent employment record and solid income, it can help you get a good loan rate.

If you’re self-employed, lenders can often be more wary. Providing multiple years of tax records and business financial statements to show a consistent income from your business can help assuage those fears.

Tip 4: Reduce your debt-to-income ratio by paying off debt

Your debt-to-income (DTI) ratio is the ratio of your monthly income compared to your monthly loan payments. The higher the ratio, the more of your money you spend on paying off debt, so reducing your DTI ratio can make lenders see you as a less risky borrower.

You can reduce your DTI ratio in two ways: by increasing your income or by paying off existing loans. Do your best to pay down your debts and consider avoiding using your credit card for a month or two before applying for a loan to keep its balance low.

DTI ratio requirements can vary from lender to lender and loan program to loan program. Conventional loans typically require a DTI ratio of no more than 36% including the potential mortgage payment. FHA loans require a DTI ratio of no more than 31% for housing-related costs and 43% for all debt. Jumbo loans, which are for large amounts that don’t conform with limits set by Fannie Mae and Freddie Mac, often require DTI ratios of 45% or less but also demand strong credit.

Tip 5: Choose a fixed-rate or adjustable-rate mortgage (ARM)

Mortgages can come with two types of interest: fixed-rate and adjustable-rate. Adjustable-rate loans usually have a lower up-front rate, but it can change, making these loans less predictable.

Fixed-rate mortgages

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

Adjustable-rate mortgages

Adjustable-rate mortgages (ARMs) have an interest rate that is fixed for an initial period, then adjusts on a regular schedule after that. For example, a 5/1 ARM has a intro rate that is fixed for 5 years, then adjusts annually.

The upside of ARMs is that they usually have lower up-front rates. However, once the intro period ends, the rate can rise, which also causes an increase in your monthly payment. If rates rise significantly, you could find that your loan payment becomes unaffordable.

That means that ARMs are usually best for people who plan to move or refinance a few years after buying a home. If you’re thinking about buying or refinancing, check ARM rates on occasion to see if you can land a big discount compared to a fixed-rate loan.

Tip 6: Consider prepaid mortgage points

Mortgage points are a form of prepaid interest. You can pay an up-front fee when closing on the loan to reduce the interest rate of the mortgage.

Typically, one point costs 1% of your loan amount and reduces the rate of the loan by 0.25%. For example, if you’re borrowing $400,000 at 6% interest, you could buy one point for $4,000 to reduce the interest rate to 5.75%.

The upside of points is that you can save a lot in the long run. Reducing the rate on a $400,000 loan from 6% to 5.75% would reduce your payment from $2,398.20 to $2,334.29, saving you just over $23,000 over the life of a 30-year loan – far more than the $4,000 you paid.

The downside is that buying points is another up-front cost that not everyone can afford. You may also lose out if you decide to refinance your loan because you don’t get the money you paid for points back when you refinance. Paying for points works best if you plan to keep the loan for the long run.

Tip 7: Choose a shorter loan repayment term

Choosing a 15-year loan repayment term instead of a 30-year term can save you a lot of money because you’re more likely to get a lower interest rate, since lenders see a 15-year repayment term as less risky.

Plus, with a 15-year term, you’ll 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 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

Buying a home and getting a mortgage is a big commitment, so shopping around for a good deal is key. Every lender offers different types of loans and will give you a different quote for interest rates and fees.

You can get preapproved with multiple lenders without impacting your credit any more than getting preapproved with one. That will let you compare what each offers.

While you should, of course, look for the lowest interest rate available, don’t forget to compare other details such as the closing costs of each loan and whether they have unusual features or clauses such as early repayment penalties.

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

When it comes to mortgage rates, there’s only so much that you can control. Other factors such as the economy and the rate market also influence things.

Current market interest rates

Mortgage rates are influenced by the overall rate market, which is itself affected by the overall state of the economy. In general, when the economy is strong or inflation is high, central banks increase interest rates to help stop things from overheating. This causes mortgage rates to rise.

Conversely, a weak economy can lead central banks to lower rates, making mortgages cheaper.

Unfortunately, you don’t have any control over these kinds of market factors, and predicting the future requires a crystal ball, so do your best to focus on what you can control, like your down payment and shopping around with multiple lenders.

Type of loan

The type of loan you apply for will also influence the rate you’ll pay.

For example, government-backed loans often have lower rates than conventional loans because the government offers some insurance to lenders. That insurance makes the loans less risky, so lenders can offer lower rates.

Jumbo loans, which are for large amounts and don’t conform to requirements set by Fannie Mae and Freddie Mac, often have higher rates than conventional loans. This reflects their higher risk because lenders need to put more money on the line when offering these large loans.

Don’t be afraid to apply for a few different loan types to see what rates you can qualify for and choose the best one for your needs.

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 as 0.25% can translate into 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, or mortgage insurance.

Should you wait for lower mortgage rates?

If mortgage rates are high right now, it can be tempting to try to wait around and keep renting until rates drop.

There are some benefits to this strategy. Of course, lower rates mean a lower monthly payment, and it’ll save you the cost and hassle of refinancing to land a lower rate if you buy a home sooner rather than later.

On the other hand, mortgage rates can be unpredictable, and it may take months or years before rates fall. They could even go up, making your potential mortgage more costly. Home prices could also increase, making homeownership less affordable.

Think carefully about whether waiting is the right move for you. It may be better to reassess the type of home you’re looking for and to try to buy a home you can more reasonably afford.

The bottom line: Getting the best rate available requires preparation

Mortgage rates can be volatile, but there are a lot of things you can do to try to land a lower rate. In general, anything you can do to show your lender that you have the financial resources to handle your mortgage payment and have a track record of handling debt well, the better it will be for you.

If you’re ready to start looking for homes, Rocket Mortgage is here to help. Reach out to one of our Home Loan Experts today to get help deciding which loan product is right for you.

Rocket Mortgage is a trademark of Rocket Mortgage, LLC or its affiliates.