How to Get the Best Mortgage Rate

How to Get the Best Mortgage Rate

There are several steps you can take to qualify for a lower interest rate on your mortgage loan. While you can't control market conditions, here's what you can do.

Improve Your Credit Score

Your credit score is a major factor in determining your mortgage rate because it indicates how likely you are to repay the debt on time. While you typically only need a score of 620 or higher to get approved for a conventional loan, the best interest rates are reserved for borrowers with scores in the mid- to upper-700s or higher.

Start by checking your Experian credit report and FICO^® Score^☉ to get an idea of where you stand. Then, take steps to improve your credit based on what you find. Potential steps may include:

• Get caught up on past-due payments and pay on time going forward
• Pay off collection accounts
• Pay down credit card balances
• Minimize new credit applications
• Ask a family member to add you as an authorized user on their credit card account

Demonstrate Steady Employment

Your employment status is another major factor because it indicates whether you're likely to be able to continue making mortgage payments.

If you switch jobs frequently or move to a different career field, it can be challenging to persuade a lender to offer you a lower rate. Your best bet is to stay with the same employer or in the same field for at least two years before applying for a home loan.

Learn more: What Happens if You Lose Your Job Before Closing on a Mortgage?

Make a Bigger Down Payment

The more money you put down, the less you'll need to borrow. As a result, lenders may be willing to offer you a lower interest rate.

What's more, a 20% down payment on a conventional loan will also eliminate the need for private mortgage insurance (PMI), which can also reduce your monthly payment.

That said, it can take several years to amass that much in savings, so you'll want to find a balance between your ability to save and your desire for homeownership.

Utilize Special Programs and Discounts

If you qualify for a government mortgage loan program, you may be able to get a lower interest rate in addition to other benefits. In particular, here are some situations where these options may make sense:

• FHA loan: Anyone who meets the basic requirements for a Federal Housing Administration (FHA) loan can apply. However, you may get a lower interest rate if you have a relatively low credit score.
• USDA loan: You may qualify for a U.S. Department of Agriculture (USDA) loan if you're planning to buy a home in an eligible rural area and have low to moderate income.
• VA loan: You may qualify for a Veterans Affairs (VA) loan if you're an eligible veteran, active-duty service member, National Guard or Army Reserve member, or a surviving spouse of a deceased veteran.

Some financial institutions may even offer interest rate discounts to their wealthier clients as a relationship bonus.

Pay Mortgage Points

Mortgage points, also called discount points, are a form of prepaid interest. You can generally knock between 0.125% and 0.25% off your mortgage rate in exchange for 1% of the loan amount paid up front.

Because the upfront charge can be high, it's important to do a break-even analysis to make sure it's worth it. For example, if you pay $5,000 to save $50 on your monthly payment, you'll need to remain in the home for at least 100 months—a little more than eight years—to recoup that cost.

Learn more: Are Mortgage Points Worth It?

Choose a Shorter Loan Term

If you can afford it, consider taking on a 15-year mortgage instead of a 30-year loan. Lenders typically offer lower rates on shorter terms because it takes less time to recoup their investment.

That said, the monthly payment can still be considerably higher. Even if you can afford it, it may limit your financial flexibility in the future.

Learn more: How to Choose the Best Loan Term for Your Needs

Compare Multiple Lenders

It's absolutely critical to shop around and compare interest rates, fees and other features from multiple lenders before choosing one for your mortgage loan.

In general, it's recommended to get preapproved with at least three lenders so you can get an idea of what you qualify for. You can even use the different offers you receive to negotiate a lower interest rate with the lender you ultimately choose.

Other Factors That Determine Mortgage Rates

Although you're not entirely helpless when it comes to the mortgage rate you get, there are some factors that are outside of your control. Here are some of these elements and how they influence the rates lenders offer:

• Inflation: Inflation negatively impacts the value of the U.S. dollar, thereby increasing the price of various goods and services, as well as mortgage loans. Inflation can also reduce demand for home loans, resulting in higher rates.
• Bond market: The interest rate for 30-year mortgages uses the 10-year Treasury note yield as a benchmark. So, as the yield moves, mortgage rates typically follow suit.
• Economic growth: As the economy thrives, mortgage lenders often charge higher rates because they're seeking a higher return on their investment. In contrast, during economic contraction, lenders typically offer lower rates to stimulate borrowing.
• Lender policies: Each lender has its own approach to evaluating risk from both economic and individual factors, which is why you may get different rate offers for the exact same application.

How to Lock In Your Mortgage Rate

Once you've put an offer on a house, it's recommended that you lock in your mortgage rate. This will prevent your rate from increasing along with market rates before you close on your loan.

At the same time, it can also mean you won't benefit from lower market rates unless you re-apply with a different lender. As you approach a rate lock, here are some things to keep in mind:

• Get the agreement in writing. The last thing you want is a surprise when you go to close on your home loan. Make sure your lender specifies your rate lock, along with its terms, in writing.
• Ask about a float-down option. In some cases, lenders may allow you to adjust your rate downward in the event that market rates decline, though you may need to pay a fee for that option.
• Avoid making major financial changes. Rate locks typically won't keep if there are significant changes to your application—for example, if your credit score or income declines, you want to borrow more money or put less down, you want a different loan type or the home appraisal comes in low.

Frequently Asked Questions

Safeguard Your Credit Throughout the Mortgage Process

Improving your credit score before applying for a mortgage loan is important, but so is maintaining that progress throughout the process until you reach closing. If your credit score goes down at all, it could result in less favorable terms or, in extreme cases, denial.

With Experian's free credit monitoring tool, you can stay on top of your FICO^® Score and Experian credit report with real-time alerts when changes are made to your report. Continue to practice good credit habits and avoid new credit applications to avoid potential ramifications that could impact you getting the best mortgage rate.