Mortgage rates have been on a roller coaster ride this year, rising and falling amid inflationary pressures and economic uncertainty. Unfortunately, even the experts are divided when it comes to predicting where rates are headed next.1
This climate has been unsettling for some homebuyers and sellers. However, with proper planning, you can work toward qualifying for the best mortgage rates available today, or the possibility of refinancing at a lower rate in the future.
How does a lower mortgage rate save you money? According to Trading Economics, the average new mortgage in the United States is currently around $410,000.2 Let’s compare 5.0% and 6.0% fixed interest rate loans of that amount over a 30-year term.
|Mortgage Rate |
|Monthly Payment on $410,000 Loan|
(excludes taxes, insurance, etc.)
|Difference in Monthly Payment||Total Interest Over 30 Years||Difference in Interest|
|6.0%||$2,458.16||+ $257.19||$474,936.58||+ $92,587.86|
With a 5% rate, your monthly payments would be around $2,201. At 6%, the payments would jump to $2,458, approximately $257 more. That will add almost $92,600 to interest paid over the life of the loan. In other words, reducing your interest rate by just one percentage point could put nearly $100K more in your pocket over time.
So how can you improve your chances of securing a low mortgage rate? Simply implement these eight strategies:
1. Raise your credit score.
Borrowers with higher credit scores are viewed as “less risky”. As a result, lenders offer them lower interest rate loans. Good credit scores typically fall in the 690 to 850 range. Of course, the higher in that range your score falls, the better terms you will be able to secure for your mortgage loan. 3 If you don’t know your score, check with your bank or credit card company. They may be able to offer you a free peek. If not, you can avail yourself of one of the many online services that offer free access to credit scores. Our favorite is https://www.creditkarma.com.
If your credit score is low, take steps to improve it. Here are some suggestions:4
- Correct any errors on your credit reports. You can access reports for free by visiting AnnualCreditReport.com.
- Pay down revolving debt, including credit card and home equity line of credit balances.
- Avoid closing old credit card accounts in good standing. Doing so may lower your scores by shortening your credit history and shrinking your total available credit.
- Make all future payments on time. Prioritize doing so because payment history is a primary factor in determining your credit score.
- Limit the number of credit applications you make to a bare minimum. Remember that each time you apply, your credit is verified. Of course, each such action lowers your credit score a little.
- If you are shopping for a car loan or mortgage, select a 14 to 45 day window to do so. By working within such a narrow window, you will minimize the impact of credit verifications on your score.
2. Keep steady employment.
If you are preparing to purchase a home, now might not be the best time to make a major career change. Understand that lenders look at the length of time you are continuously employed at your current job or in your current career. They do so because these factors are indications of the stability of your income stream. Of course, the more stable your income stream is, the more secure lenders feel and the better loan terms they are willing to offer you. Typically, they prefer to see at least two years of stable, continuous employment.
That doesn’t mean a job change will automatically prevent you from qualifying for a mortgage. However, changing careers, or becoming self employed in place of drawing a salary, may diminish your ability to qualify for a mortgage loan.6
3. Lower your debt-to-income ratios.
Even if you have a high credit score and a great job, lenders will still be concerned if your debt payments are consuming too much of your income. Debt-to-income ratios(DTIs) are the tools lenders will use to evaluate if they have cause for concern.
There are two types of DTI ratios:
Front-end ratio — The percentage of your gross monthly income allocated to pay your housing expenses. These include mortgage payments, taxes, insurance, and association dues or fees.
Back-end ratio — The percentage of your gross monthly income allocated to pay ALL of your fixed obligations. These include housing expenses and the monthly cost of servicing all other debts.
What do lenders consider to be acceptable DTI ratios? They typically look for a front-end ratio no higher than 28% and a back-end ratio no higher than 36%.7 But what if your ratios are too high? Then it is time for you to take action to bring them into compliance. For example, you may choose to set your sights on a less expensive home, or to increase your down payment, to bring your front end ratio down. To be sure, either of these steps will also lower your back-end ratio. But if you must do more to bring the latter into compliance, you may have to pay down some other existing debt or find a way to increase your income. Of course, the second option may be easier to recommend than to accomplish.
4. Increase your down payment.
Minimum down payment requirements vary by loan type and in relation to your financial strength. But in some cases, you may qualify for a lower mortgage rate if you make a larger down payment.8
Why do lenders care about the size of your down payment? Because borrowers with significant equity in their homes are less likely to default on their mortgages. Additionally, the more equity borrowers have in their homes, the less risk the lender faces in the event of a loan default. Of course, to insure against additional risk conveyed by low equity loans, conventional lenders often require borrowers who put down less then 20% to purchase private mortgage insurance (PMI).
A larger down payment will also lower your overall borrowing costs and decrease your monthly mortgage payment since you’ll be borrowing less. Of course, in calculating how much down payment you can afford to make, you must not overlook the funds you will need to close on your home and pay for moving and living expenses. You would also be wise to consider setting aside a reasonable amount of funds as a reserve for contingencies.
5. Compare loan types.
All mortgages are not created equal. The type of mortgage loan you choose will impact your monthly mortgage payment, the amount of interest you will pay over the life of the loan and much more.
For example, here are several common loan types available in the U.S. today:9
Conventional Loans – These loans may offer lower interest rates, but often have more stringent credit and down payment requirements than other loans.
FHA — Backed by the government, these loans are easier to qualify for, but often charge a higher interest rate.
Specialty — Certain specialty loans, like VA or USDA loans, might be available to you if you meet specific requirements.
Jumbo — These are mortgages that exceed the local conforming loan limit. As a result, they are subject to stricter lending requirements and may feature higher interest rates and fees.10
When considering a loan type, you’ll also want to weigh the pros and cons of fixed and variable interest rate mortgages:11
Fixed rate — A fixed-rate mortgage, guarantees that the interest rate will remain unchanged for the entire life of the loan. Traditionally, these have been the most popular mortgages in the U.S. because they offer stability and predictability.
Adjustable rate — Adjustable-rate mortgages, also referred to as ARMs, have a lower introductory interest rate than fixed-rate mortgages, but the rate can rise after a set period of time, typically 3 to 10 years.
According to the Mortgage Bankers Association, 10% of American homebuyers are now selecting ARMs, up from just 4% at the start of this year.12 An ARM might be a good option if you plan to sell your home before the rate resets. However, life is unpredictable, so it’s important to weigh the benefits and risks involved.
6. Shorten your mortgage term.
A mortgage term is a time period over which you will make mortgage payments. Typically, 15, 20, and 30 years are the most popular terms available.13 Although the majority of homebuyers choose 30 year terms, if your goal is to minimize the amount of interest you’ll pay over the life of your loan, you should consider a 15-year or 20-year mortgage.
Shorter term loans carry a lower risk of default, so lenders typically offer lower interest rates on such loans.13 However, it’s important to note that even though you’ll pay less interest, your mortgage payment will be significantly higher each month. Therefore, you will have to show much more financial strength to qualify for a shorter term loan.
7. Get quotes from multiple lenders to lower mortgage rates
When shopping for a mortgage, be sure to solicit quotes from several lenders and compare the terms and interest rates offered. You may be surprised by the variety of options available and excited to find that one of your choices saves you money, while conforming to your needs better than the others. Some borrowers prefer to work with a mortgage broker. Like an insurance agent, a mortgage broker may represent many lenders and be able to direct you to one whose mortgage program fits your needs best. However, please understand that brokers are compensated by lenders. Therefore, you would be wise to contact more than one so you can compare your options here as well.14
Of course, we work with several lenders we know and trust and would be happy to recommend one to you if you like.
8. Consider buying points to lower mortgage rates!
Even if you are offered a great interest rate, you may be able to lower it even further by buying points. When you buy mortgage points, you essentially pay your lender an upfront fee in exchange for a lower interest rate. The cost to purchase a point is 1% of your mortgage amount. Additionally, for each point you buy, your mortgage rate will decrease by a set amount, for example 0.25%.15
However, it only makes sense to buy mortgage points if you plan to stay in the home long enough to recoup the cost. Therefore, you would be wise to determine how long it will take you to recoup your investment by dividing the cost by the amount you save on your mortgage payment each month.15 This will tell you how many months you will have to stay in your home to recover the amount it will cost to buy down your mortgage interest rate.
Getting Started On The Road To Lower Mortgage Rates
Unfortunately, the historically low mortgage rates we saw during the height of the pandemic are behind us. However, today’s 30-year fixed rates still fall well below the historical average of around 8%.
Although higher mortgage rates have made it more expensive to finance a home purchase, they have also eliminated some of the competition. Consequently, today’s buyers are finding more homes to choose from and fewer bidding wars. Therefore, if you are ready and able to buy, there is no reason to wait. Consider that many economists predict home prices to continue climbing.18 Of course, you will always have the option to refinance if mortgage rates do go down, but you can’t make up for years of lost equity growth and appreciation if you wait to pull the trigger until they do.
If you have questions or would like more information about buying or selling a home, reach out to us. We’d love to help you weigh your options, navigate this shifting market and make the lifestyle you desire a reality!
“Housing wealth, the net equity held by households, consisting of the value of their homes minus their mortgage debt, is the most important source of wealth for all but those at the very top.” – Janet Yellen
A mortgage provides leverage that geometrically increases the return homeowners earn on their investment. Therefore, it is the key to wealth accumulation for most Americans. But it is also the key to building great wealth for those members of the top ten percent who portfolio real estate investments. After all, what other investment vehicle allows you to generate revenue from which you pay mortgage payments and operating expenses, and possibly enjoy positive cash flow as well? What other investment opportunity allows you to safely invest a small percentage of its purchase price, while benefiting from 100% of its appreciation? Isn’t leverage amazing?
Andrew Kruglanski, MBA, ABD, Broker
Trading Economics –
Consumer Financial Protection Bureau –
Consumer Financial Protection Bureau –
Federal Trade Commission –