How to Get the Best Mortgage Rate

What determines your mortgage rate?

Many factors determine your mortgage rate (or interest rate), including:

• Your credit score
• Your debt-to-income (DTI) ratio
• The loan-to-value (LTV) ratio on your mortgage
• The type of loan you get
• What’s happening in the economy

While you can’t control 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,” he said.

» SEE RATES: Current Mortgage Rates — Check Today’s Rates

7 ways 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.

1. Improve your credit score

One of the best things you can do to get a better mortgage rate is to 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.

2. 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.”

3. 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.”

4. 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.

5. 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.

6. 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.

7. 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. So, if rates decrease, you can lock your rate into a new, lower rate one time before you close on your loan.

» LEARN: What Does “Marry the House, Date the Rate” Mean?

How much 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.