How to Get a Lower Interest Rate on Your Mortgage: A Guide
Article • 12/27/2021 • 10 minute read
How to Get a Lower Interest Rate on Your Mortgage: A Guide
Interest rates are a point of contention when it comes to financing your home, and it’s somewhat of a necessary evil. While it can feel frustrating to pay interest each month in addition to the principal balance, mortgage lenders are in the business of making money and need to accrue some profits after giving you such large sums of money.
With that said, locking in low-interest rates is entirely possible, and it can help to alleviate the burden associated with these extra costs. But where do you even start?
Getting a lower interest rate on a new mortgage, or even on your existing mortgage, is entirely possible -- and it’s not as hard as it may seem. Here’s everything you need to know about getting lower interest rates on your home loaN with Network Capital.
When you take out a loan of any kind, there are two components: the principal balance and the interest. The principal is the amount of money you borrowed. The interest is a percentage of that amount that the lender receives in order to profit.
Only a portion of your monthly payments actually goes towards paying down the principal balance, as the remaining portion goes to paying off interest. This is so that the lender makes as much money as possible during the life of the loan.
Interest is higher when your principal balance is higher, so lenders want you to pay off the loan for as long as possible. But this can mean you’re paying a lot in interest on your end. For that reason, it’s always good to try to pay less interest when you can.
Getting Lower Interest on a First-Time Mortgage
When shopping around for your first mortgage, there are a few different ways that you’re able to get lower interest rates and more attractive loan features right off the bat. Here are some of the best tips and tricks.
Enhance Your Credit Score
Lenders evaluate your financial proficiency to determine your eligibility for a loan, many different factors are at play. But one of the main criteria is your credit score, which shows the lender how reliable you are in terms of repaying loans.
Lenders are taking a risk by offering such large sums of money to borrowers, and they want to make sure they minimize that risk where possible. If your credit score is strong, you’ll be viewed as a more reliable borrower and will likely be given lower interest rates than someone with a poor credit score.
Homeowners with poor credit often see higher interest rates because the lender wants to recoup more interest if the borrower defaults or is unable to make payments on the loan.
Typically, having a credit score of over 680 not only increases your eligibility for loans with more attractive features overall, but it often saves you money on interest in the long term.
Some ways to increase your credit score include making timely monthly mortgage payments, paying down your balance to 30% of the limit, and opening up new lines of revolving credit.
Save Up For a Larger Down Payment
If you’re able to make a large down payment upfront, you can help get a lower mortgage rate. For one, this shows a lender that you’re financially capable of paying back the loan. But on top of that, it physically lowers the principal balance, so you’re paying less interest throughout the life of the loan.
But on top of that, if you can put at least 20% down on a home loan, you won’t need to pay private mortgage insurance, which is a fee that a lender may require as another way of reducing their risk. This can save you money on monthly payments as well.
Pay Discount Points
Discount points are fees that you can pay upfront to reduce interest rates on your mortgage. A point is equal to 1% of the loan amount, and that normally translates into roughly a 0.25% mortgage rate decrease.
While discount points can save you interest throughout the life of your loan, they often cost thousands of dollars upfront. With that in mind, it can take many years for you to see the financial return to make the investment worth it.
Consider a 15-Year Fixed Mortgage
When many people buy their first home, it’s common to go for a 30-year mortgage plan in which monthly payments are made for 30 years. However, you can save tons of money on interest if you go with a 15-year mortgage instead.
While monthly payments will be higher during that time period, remember that interest rates are only based on the principal balance. If you can lower the principal balance more quickly over a shorter loan term, you’ll save thousands when all is said and done.
Additionally, fixed-rate mortgages tend to be preferred over adjustable rates (ARM), as fixed rates guarantee you’ll pay the same in monthly interest over the entire course of the loan. ARMs may have a low introductory period, but you never know when interest rates will sharply increase later on.
Lock In Your Rate
Mortgage rates are constantly changing every week, day, or even hour. When your lender offers you a mortgage rate at the time of intent, the interest will likely fluctuate between that moment and when you finally close on your home.
While this might mean you’ll get lower interest rates, it can also mean that your rate increases during that period. A mortgage rate lock is a period, usually 15 to 60 days, in which the offered interest rate cannot change. So whatever your lender gave you upfront is what you’ll pay, as long as you can close within the period.
While you’ll pay a lock-in deposit to secure your locked-in rate, this will be credited back to you once you close on the home. However, you won’t get that money back if you walk away before closing.
Set Up Automatic Payments
Many lenders offer discounts if you set up auto-pay on your mortgage payments. Since this almost guarantees you’ll be making your payments on time, lenders are often willing to give you a bit of an incentive to do so.
When you think about your budgeting for the month, keep this in mind, so you don’t get blindsided by the payment. Additionally, keep in mind that a lender may remove the interest rate discount if you close your account or change banks.
Enhance Your Qualifications
There are many different types of home loans on the market, and they each come with different rates of interest. In general, the lower your qualifications, the higher your interest rate is likely to be.
Conventional loans tend to have the lowest interest rates because the standards for qualification are the most strict. Borrowers who are eligible for these types of loans have good credit, low debt to income ratio (DTI), and can make large down payments.
FHA mortgages and USDA mortgages are much easier to qualify for, but since the borrowers of these loans are often at higher risk and lack the financial profile required for conventional loans, these usually come with much higher interest rates.
Lowering your debt to income ratio, improving your credit score, and finding stable employment are just a few ways to increase your odds of being qualified for a conventional mortgage with lower interest.
Getting Lower Interest on an Existing Mortgage
If you’ve already taken out a mortgage and you feel like you’re paying too much, it’s not too late to make some adjustments to your existing mortgage to obtain lower rates. Here’s what we think are the best options.
Refinancing is often the most popular avenue for getting lower interest rates on your monthly payments, and it’s for a good reason. Refinancing involves getting an entirely new mortgage loan from a different lender (or the same lender) in an attempt to achieve better features.
Most of the time, a refinance is done to lower interest. For example, you may have originally taken out your home loan during a time when interest rates were relatively high. If rates fall across the board, refinancing can help you get a new loan with lower rates than you were paying beforehand.
Refinancing can also be helpful to change the length of your loan’s terms. Let’s say you have a 30-year mortgage, but you want to cut the payment period in half. You can refinance into a 15-year mortgage to pay off your home quicker, therefore accruing less interest over time as well.
At brick and mortar institutions, one the biggest drawbacks of refinancing are that it’s not processed timely as it has been known to take weeks or months. Additionally, there are additional upfront fees associated that might offset some of its benefits. Network Capital offers straightforward home loan options that are quicker and close in as few as 15 days in many cases.
Principal Only Payments
If you can make an extra principal-only payment to your loan when possible, you can tap down the interest quicker than you may think. Even an additional $20 a month can help you pay off your loan a little faster and help save you hundreds or thousands by the end of the term.
Remember that your interest is based on the principal balance. If you pay more than your minimum on a given month to bring down that balance, your interest payments will subsequently lower as well.
An easy trick to get this done is by making bi-weekly payments rather than monthly payments. When you pay monthly, you’ll make 12 payments throughout the year. However, if you pay bi-weekly, you’ll make 26 total contributions. That equals 13 months.
This extra month will barely be noticeable to your bank account, but it can help you pay off your balance much faster. Naturally, this will let you save on interest.
Just make sure you check with your lender before you decide to make extra principal-only payments. Some lenders do not allow you to do this, and others may charge a prepayment fee in order to offset some of the money they’d lose because of you paying off the loan early.
Drop Your Private Mortgage Insurance
If you make a down payment of less than 20% on your home. You’ll need to keep paying this until you reach 22% equity in your home, at which point it is automatically discontinued.
However, you can request to eliminate PMI immediately once your mortgage balance hits 80% of the total price or reach 20% equity in the home. This can help save you some money in the short term. You can speed up the process by making extra principal payments.
While this may not actually lower your interest rate, it will dramatically lower your monthly fees. Not to mention, if you refinance, you may be able to eliminate PMI if the new balance is below 80% of the home value.
Getting a lower interest rate on a mortgage is a great way to save a ton of money over time. While interest will lower naturally while your principal balance goes down, there are ways to expedite the process and pay less per month.
Some ways to snag lower rates off the bat are by strengthening your credit score, locking in your rate, shopping around for lower rates, paying discount points, making a larger down payment, or choosing a 15-year mortgage over a 30-year mortgage.
Additionally, if you already have a mortgage, you can lower interest by refinancing, recasting, asking your lender for a lower rate, making principal-only payments, or dropping your private mortgage insurance early.
You can also get lower interest rates by knowing where to look. Network Capital offers competitive rates with $0 lender fees on certain programs. And with everything from intent to closing done in-house, we can get you to the closing table in as little as 15 business days.
What are discount points and lender credits and how do they work? | Consumer Financial Protection Bureau
Loans | HUD.gov / US Department of Housing and Urban Development
What is private mortgage insurance? | Consumer Financial Protection Bureau
What is a prepayment penalty? | Consumer Financial Protection Bureau