How Can Someone Secure a Good Interest Rate on a Mortgage?

I co-owned three condos during my marriage: one that we lived in, one that we rented out, and one that we flipped. We both had excellent credit scores and received competitive interest rates on our mortgages.

Understanding how to secure a good interest rate on a mortgage can save thousands of dollars in interest. Lowering the total cost of your home and monthly payments supports your ability to own a home. The following information can help.

Improve Your Credit Score

Your credit score indicates the likelihood of repaying a debt on time, a significant factor in determining your interest rate on a mortgage. Whereas a credit score of 620 or higher is typically needed for approval on a conventional loan, scores in the mid- to upper-700s usually secure the best interest rates.  

Improving your credit score could save you thousands of dollars over the life of a mortgage. The following tips can help:

• Visit AnnualCreditReport.com to check your credit reports, credit scores, and Fair Issac Corporation (FICO) Scores.

• Report any credit report errors to Experian, TransUnion, or Equifax.

• Pay off any collection accounts.

• Catch up on any past-due payments.

• Reduce any credit card balances.

• Minimize new credit applications.

• Pay your bills on time.

Demonstrate Steady Employment

Highlighting your steady employment and financial stability indicates your ability to make mortgage payments on time. Staying with the same employer for at least 2 years to provide documentation of a steady job, a reliable income source, and a healthy savings history can help you secure a good interest rate on a mortgage.

Consider Government Mortgage Programs

A mortgage guaranteed by the federal government can help eligible individuals secure a good interest rate. The types of mortgages and qualifications include:

• FHA loan: A Federal Housing Administration loan can help individuals with a lower credit score and down payment who want to purchase a primary residence.

• USDA loan: A U.S. Department of Agriculture loan can help individuals who meet income and credit score requirements and want to purchase a home in select rural or suburban areas.

• VA loan: Eligible active-duty service members, veterans, and surviving spouses with lower credit scores can purchase a home with no down payment.

Increase Your Down Payment

A down payment of at least 20% on a conventional loan eliminates the need for private mortgage insurance (PMI), which protects the lender from losses if a borrower defaults on their mortgage payments. Borrowing less for a mortgage encourages lenders to offer a lower interest rate.

Consider a Shorter Loan Term

Lenders typically offer lower interest rates for 10- or 15-year mortgages because they can recoup their investment faster than with 30-year loans. However, the monthly payments typically are higher, which can limit your financial flexibility in the future.

Compare Lenders

Shop around and get pre-approved from at least three banks, credit unions, or mortgage brokers to determine how much you can spend on a home. Include your bank or credit union, which might offer a relationship discount, and online mortgage lenders, which have less overhead than brick-and-mortar lenders and can offer lower interest rates.

Request loan estimates outlining the terms, fees, and closing costs of each offer. Compare the lenders’ interest rates, fees, and other features to determine the best value. Consider using your pre-approvals to negotiate a lower interest rate with your chosen lender.  

Pay Mortgage Points

Mortgage points, also called discount points, are a form of prepaid interest that can reduce the interest rate by 0.125% to 0.25% in exchange for paying 1% of the loan amount upfront. Since the upfront charge can be high, conduct a break-even analysis to determine the value. For instance, if paying $5,000 upfront can save $50 on your monthly payment, you would need to stay in the home for at least 100 months, approximately 8 years, to recoup the cost.

Negotiate Points and Fees

Negotiate origination fees, closing costs, and other expenses. Minimizing out-of-pocket expenses lowers the overall amount paid for your mortgage.

Lock In the Interest Rate

Because mortgage interest rates can fluctuate daily, consider a lender that lets you lock in your rate as you shop around or go through the underwriting process, when the lender verifies your financial information and the property value to assess the risk of extending a mortgage. If interest rates drop during this lock period, the lender should let you take the lower rate. Although most locks are free for 30 or 60 days, you might need to pay for a longer one.

These tips can help you lock in the interest rate on a mortgage:

• Get the rate lock and terms in writing.

• Consider asking about a float-down option, which might adjust your interest rate downward if the market declines, and can include a fee.

• Maintain financial stability. Reductions in your credit score or income, the need to lower your down payment or borrow more money, the desire for a different type of loan, or a home appraisal that is lower than expected can impact your interest rate.

Work with a Licensed Professional

Consider working with a mortgage originator, a person or entity that facilitates the mortgage process, such as an individual employed by a bank or credit union, a mortgage broker, or a financial planner. Along with offering insights into market trends and lender practices, a mortgage originator can help you with the following:

• Finding the right loan product

• Gathering the required financial information

• Negotiating the interest rate

• Guiding you through the application and closing process

*This information is for educational purposes only.