How to get the best mortgage rate

A good rate can save you a lot of money in the long run

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Recent data from Freddie Mac suggests the rates on 30-year home loans increased by more than 3.5% from mid-2020 to mid-2023. This rising rate environment makes it even more critical to find a rate you can afford to pay.

Although you can’t control what’s happening in the economy, there are things you can do to reduce your interest costs. A good rate will not only make your monthly mortgage payments more affordable, but could save you thousands of dollars in interest over time.

Key insights

  • Your mortgage rate is based on factors such as what’s happening in the economy, your financial condition and the size of your down payment.
  • Three ways to get the best possible rate are to build good credit, lower your debt-to-income ratio and make a larger down payment.
  • You may get a better rate by considering a government-backed loan.

What determines your mortgage rate?

Your mortgage rate (or interest rate) is determined by many factors, including your credit score, debt-to-income (DTI) ratio, the loan-to-value (LTV) ratio on your mortgage, the type of loan you get and what’s happening in the economy.

According to Freddie Mac, average 30-year mortgage rates increased from 3.07% as of the week ending July 2, 2020, to 6.71% as of the week ending June 29, 2023.

While you can’t control what’s happening in the economy, there are factors you can control when searching for the best mortgage rate. For example, you can make sure your “credit, DTI ratios, and down payment are in good shape at the time of application,” said Scott Haymore, head of capital markets and mortgage pricing at TD Bank. “These factors are what lenders use to determine what kind of mortgage will best suit a borrower and will impact their rate.”

» MORE: Interest rates and how they work

How to get a better mortgage rate

There are several ways to get a better interest rate on your mortgage, depending on your budget and financial circumstances and what type of home loan you want.

Improve your credit score
One of the best things you can do to get a better mortgage rate is work to improve your credit. This is because your credit score is a major factor used to determine if your loan will be approved and the mortgage rate you’ll receive, explains Shelby McDaniels, national director of business development at JPMorgan Chase.

A high credit score “tells lenders that you have paid your credit card bills on time and that you are responsible with your money,” said McDaniels. “... any score in the 700s or above is considered good and will help you get you a loan with a lower interest rate.”

Many banks offer credit report monitoring services, which can be a good way to keep track of your score. These services can alert you to new accounts in your name and credit inquiries. McDaniels explained that these services may “also notify you if there are changes in your credit usage, limits or balances.”

If your financial institution doesn’t offer credit monitoring, there are many other paid and free credit monitoring services .

Credit counseling is also an option if you need help learning how to improve your credit score, get out of debt or even build a budget.

Reduce your debt-to-income ratio
Your DTI compares your monthly debt payments to your monthly income. A lower ratio means you have more available income to cover your debt payments. Lenders often want DTIs to be at most 36% to 45% but may go up to 50% in some cases.

“Creditors look at your debt-to-income ratio to determine how risky it is to lend to you,” said McDaniels. “The higher your ratio, the riskier they consider lending to you to be, and the smaller chance you have of being approved for a home loan at a good rate.”

Make a larger down payment
Lenders might consider loans with larger down payments less risky. Additionally, if your credit score is low or your DTI is high, lenders may view a higher down payment as a way to offset some of the increased risk related to these factors.

For example, if you have a credit score of at least 580, your down payment can be as low as 3.5% on a Federal Housing Administration (FHA) loan . However, if your credit score ranges from 500 to 579, you may need to make a down payment of at least 10%.

Not only is it easier to get approved with a larger down payment, but you may also get a lower rate. Jim Black, an investor and industry advisor with Calque, explained, “... a 35% down payment may have a significant difference in interest rates because it is less risky for an investor.”

» MORE: What is the average down payment on a house?

Get a government-backed mortgage
If your credit score is low and you can’t make a large down payment, you might get a better rate by choosing a government-backed mortgage . These include FHA loans, Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans.

These types of loans are less risky to lenders because the government agrees to cover some of your loan if you don’t repay it as agreed. As a result, lenders are willing to offer better rates than they would otherwise be able to do.

Shop around
Many lenders will provide you with various rates and mortgage options after you’ve applied. For example, they might show you the rates you could get with an FHA versus a conventional loan . Plus, they might show you the rates you could get with a 15- versus 30-year repayment term.

If your mortgage lender doesn’t give you multiple options to evaluate, consider getting a quote from another lender. In many cases, you can get pre-qualified with no credit score impact. Instead, these lenders only perform a hard credit check after you decide to go through with the loan.

As you compare offers, look at each loan’s annual percentage rate (APR). This is because the APR is a composite of the loan’s interest rate and required fees. Rates and fees can vary from loan to loan, making the loan’s APR a better comparison basis.

Buy mortgage points
Another thing to consider is paying to reduce your rate by buying mortgage points . In many cases, lenders will share with you the standard rates you can get and will also let you know how much it would cost to “buy down” the rate by a certain percentage.

For example, you might be able to reduce the interest rate on your loan by 0.25% if you pay an upfront fee of 1% of your total loan amount. So, if you get a $200,000 loan, you might need to pay $2,000 to reduce your rate by 0.25%.

Before buying mortgage points, calculate how long it would take to recoup the costs through your interest savings. For example, you would pay $77,336 in interest in the first 60 months of a $200,000 mortgage with a 7.75% interest rate.

However, if you bought the rate down to 7.50% for $2,000, your total interest costs for the same period would be reduced to $74,821. The interest savings of $2,515 ($77,336 minus $74,821) would more than cover the cost you paid for the mortgage points.

On the other hand, if you plan to stay in the home for a shorter period, it might not save you any money and could instead cost more.

Lock in your rate
Once you’ve selected the loan you want, you can potentially get the best rate by locking in your mortgage rate . If you don’t lock your rate (but rather “float it” and keep it unlocked), the rate you receive will increase if market interest rates increase. So, floating your rate can be risky, especially in a rising interest rate environment.

If you’re worried that rates might decrease before you close on your home loan, many lenders offer a float-down option, which gives you “the option of a one-time float down if rates improve,” explained McDaniels from JPMorgan Chase. So, if rates decrease, you can lock your rate into a new lower rate one time before you close on your loan.

How much money can a lower rate save you?

Depending on the loan size and interest rate you get, you may save thousands of dollars.

For example, let’s say your mortgage is $200,000 and you plan to keep your home for 60 months. If you lower your interest rate from 7.75% to 6.75%, you will save $10,082 in interest over this period.

The total interest costs you could expect to pay over 24 to 84 months as interest rates increase or decrease by 0.50% are shown in the following table.

Interest costs on a $200,000 mortgage with a 30-year repayment term

View rates from leading lenders now.


    Is a fixed-rate or adjustable-rate mortgage better?

    It depends on your risk tolerance. If you’re not worried about rates potentially increasing over the life of your mortgage, you may get a lower rate if you choose an adjustable-rate mortgage (ARM). However, a fixed-rate mortgage is better if you want the security of knowing your rate will never change.

    Are mortgage rates different for different types of property?

    Yes. Properties that lenders consider riskier may carry higher interest rates than lower-risk properties. For instance, you may pay a higher mortgage rate for a vacation home or rental property than for your primary residence.

    How often do mortgage rates change?

    Mortgage rates change daily based on factors like what’s happening in the economy and market conditions. Rates might even change multiple times a day. So, when shopping for a home loan, closely monitor rates and lock in your rate as soon as possible, especially in a rising interest rate environment.

    Can you negotiate your mortgage rate?

    Yes, you can negotiate your mortgage rate. While your lender may not always be willing to offer you a better rate, in some cases, they’ll agree to match or beat other offers. Shop around so you understand market rates and are equipped to negotiate the best possible rate.

    Bottom line

    Mortgage rates reflect the amount of risk associated with the loan and the current market. When lenders set mortgage rates, one of their goals is to ensure the money they’re making on the loan via interest charges is sufficient to cover the risk they’re taking by giving you the loan.

    While you can’t change what’s happening in the economy, you can influence your mortgage rate by improving your financial condition, making a bigger down payment, comparing offers, paying mortgage points or locking in your rate.

    No matter which tactic you choose, getting the lowest possible rate might save you thousands in the long run.

    ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
    1. Consumer Financial Protection Bureau (CFPB), " FHA loans ." Accessed June 29, 2023.
    2. Fannie Mae, " B3-6-02, Debt-to-Income Ratios (05/04/2022) ." Accessed June 29, 2023.
    3. Freddie Mac, " Mortgage Rates Move Up Modestly ." Accessed June 29, 2023.
    4. U.S. Department of Housing and Urban Development (HUD), " Section A. Borrower Eligibility Requirements ." Accessed June 29, 2023.
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