It’s important to get the best interest rate for your mortgage to have the lowest possible monthly payment, and possibly the option to lower the term of your loan and build equity more quickly.
So, here are some tips for getting the best interest rate on your mortgage.
Fixed-Rate Versus Adjustable-Rate Mortgages
You can get a low introductory interest rate with an adjustable-rate mortgage (ARM), but the introductory rate (teaser rate) is temporary. After the introductory period, the interest rate fluctuates according to the terms of the mortgage.
The interest rate and monthly payment of the mortgage can vary substantially, so be sure you can afford an ARM in an environment where interest rates rise quickly.
Fixed-rate mortgages, on the other hand, do not change and provide a level of security regarding the monthly payment. However, they are likely to have a higher interest rate at the beginning of the loan compared to an ARM, but they could have a lower interest rate during the term of the loan if rates rise.
Most homeowners find that a fixed-rate mortgage is a better and safer option.
Related: Mortgage Teaser Rates
Buy Points for a Lower Interest Rate
Some mortgage lenders allow borrowers to buy points to lower their interest rate, which is called “buying down a mortgage” or a “buydown mortgage.”
To buy down a mortgage rate, borrowers pay an additional charge in the form of points (also known as “discount points”) in exchange for a lower interest rate on their mortgage. Depending on the transaction, the lender may offer a 0.25% interest rate reduction on the first point you buy. (A point is 1% of the home’s purchase price.)
To determine whether buying points is beneficial, borrowers should calculate the savings from buying down the mortgage interest rate based on how long they anticipate living in the home.
Special Home Loan Programs
If you are thinking about buying a home or refinancing an existing mortgage, talk to your mortgage broker to see if you qualify for any of the home loan programs provided by the government or a lender.
Government-backed home loan programs include:
- VA home loans are available to qualifying veterans and their spouse. The loan program includes zero down payment options.
- FHA home loans are available to U.S. residents and feature a down payment as low as 3.5%. It can also be easier to qualify for an FHA loan than a conventional loan if you have a lower credit score.
- USDA home loans feature a zero down payment option and are available to homebuyers in specified rural areas. To determine which areas are available for a USDA loan, see the USDA eligibility map.
- First-time homebuyer programs are available. For information on homeownership and home buying assistance programs in your state, see the HUD Website / Local Information.
Lenders also offer home loan programs from time-to-time that can help with the down payment or be structured to help with closing costs. Talk to your mortgage broker for details, and to determine which home loan program is best for you.
Larger Down Payment
Making a larger down payment is one of the best ways to get a lower interest rate on a mortgage. By making a larger down payment, you are sharing in more of the risk of the mortgage; therefore, the lender can lower the interest rate.
A down payment that is large enough to eliminate mortgage protection insurance will also reduce your monthly payment, and possibly give you the option to pay more principal each month and grow your equity more quickly.
Higher Credit Score
As a general rule, a higher credit score results in a lower interest rate. This is because borrowers with a higher credit score are less of a risk for the lender, since they are statistically in a better position to repay the loan.
Working to raise your credit score, then, is working to get a lower interest rate and a lower monthly payment on your mortgage.
Often times, small changes in the way you use credit can increase your credit score significantly.
- Check your credit report and correct mistakes.
- Use credit and use different types of credit.
- Judiciously apply for new credit.
- Keep balances low relative to credit limits.
- Don’t close old, unused credit accounts.
- Make sure bills are paid on time.
Do Not Finance Closing Costs
In general, paying the closing costs rather than financing them can result in a lower interest rate. However, many borrowers opt to finance the closing costs for several reasons, including cash flow.
No matter the method you choose to pay closing costs, just know that financing closing costs will probably result in a slightly higher interest rate.
Shop Interest Rates and Fees
Lenders have different interest rates and fees, so it helps to shop around for the best deal.
This is one reason many people choose to work with a mortgage broker who shops numerous lending sources to find the best home loan for you.
Video Transcript: Why did my neighbor get a better mortgage rate?
Marimark Mortgage is based in Tampa, Florida and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing, and help clients with HARP refinancing to lower their monthly mortgage payments.