When buying or refinancing a home, every homeowner desires to have the lowest monthly mortgage payment and to save money where possible.
Getting the best interest rate for your mortgage is crucial to have the lowest possible monthly payment. 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 mortgage terms.
The mortgage’s interest rate and monthly payment can vary substantially, so be sure you can afford an ARM in an environment where interest rates rise quickly.
Fixed-rate mortgages 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 than an ARM, but they could have a lower interest rate during the loan term 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, 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. For example, the lender may offer a 0.25% interest rate reduction on the first point you buy depending on the transaction. (A point is 1% of the home’s purchase price.)
To determine whether buying points are 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
Suppose you are considering buying a home or refinancing an existing mortgage. In that case, it may be possible that 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 low as 3.5% down payment. 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. See the USDA eligibility map to determine which areas are available for a USDA loan.
- First-time homebuyer programs are available. For information on homeownership and homebuying assistance programs in your state, see the HUD Website/Local Information.
Occasionally, lenders offer home loan programs that can help with the down payment or be structured to help with closing costs.
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 more of the mortgage risk; 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 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.
Then, working to raise your credit score is working to get a lower interest rate and a lower monthly payment on your mortgage.
Oftentimes, small changes in how you use credit can significantly increase your credit score.
- 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
Paying closing costs rather than financing them can generally lower interest rates. However, many borrowers opt to finance the closing costs. No matter how you choose to pay closing costs, know that financing closing costs will probably result in a slightly higher interest rate.
Shop Interest Rates and Fees
Working with a mortgage broker who shops numerous lending sources is crucial to find the best home loan for you. Lenders have different interest rates and fees, so it helps to shop around for the best deal.
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 mortgages for first-time homebuyers, conventional home mortgages, refinance loans, reverse mortgages, and FHA, VA, and USDA mortgage options. In addition, we’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.