How to Lower the Interest Rate on Your Mortgage
Your interest rate can make a significant difference in the overall cost of a mortgage.. For example, imagine you have a $200,000 mortgage with a 10 percent down payment. Now, let’s compare a mortgage interest rate of 4.5 percent versus 3.5 percent. At 4.5 percent, you’ll pay $148,332 in interest over the life of the mortgage. If your mortgage interest rate lowers by just one percent down to 3.5 percent, you pay $110,981 in interest, which is over $37,000 saved in interest!
It makes sense to want to lower your interest rate as much as possible, either before or after you’ve taken out the loan. Here are some straightforward ways you can do just that.
Save for a greater down payment
If you haven’t bought your home yet, the best thing you can do is save for a substantial down payment. The greater the down payment, the better your loan terms should be. A significant down payment means a smaller mortgage, a lower monthly mortgage payment and a better interest rate. In general, lenders expect you to have a down payment of anywhere between five percent and 25 percent to be approved for a mortgage.
Saving for a down payment can feel overwhelming, as the amount you want to save is so large. However, there are some steps you can take to make this goal more achievable:
- Make a savings plan and stick to it. If the idea of saving $40,000 feels impossible, break it down into smaller chunks.
- Put any “extra money” you get toward your down payment savings. Extra money can come from gifts, tax returns and odd jobs you pick up.
- Speaking of odd jobs, try to see if you can increase your income with a side hustle. You can find online jobs or try something like food delivery, Uber or even dog walking.
- You can also look at decreasing your expenses. While you save for a down payment, look at any and all opportunities to cut costs. This can include committing to never ordering food out, canceling subscriptions and reducing your shopping.
- Keep your money in a high-interest savings account (HISA). While the returns on these accounts aren’t overly high, it’s enough to add something to your down payment while you save.
Improve your credit
It’s important to understand that your credit score directly impacts your mortgage interest. Higher credit scores generally equal better mortgage terms. If you already have a mortgage and are looking to lower your interest rate, you can first repair your credit score.
The first step is to obtain a copy of your credit report and verify what kind of credit score you have. Review your report to ensure there are no negative items that are inaccurate or false—if there are, you can file a dispute to remove these negative items.
You can use a credit repair organization to help you with this process to achieve faster and better results than attempting to dispute negative items on your own. Credit repair helps individuals improve their credit scores by removing inaccurate items from credit reports. These services, such as CreditRepair.com, understand what details to include in a dispute to improve the chances of it being approved.
Next, educate yourself on what factors contribute to your credit score. Your credit score is based on your payment history, credit utilization, credit history, new credit accounts and credit mix. You can improve your credit score by keeping these factors in mind and maintaining healthy financial behaviors. Some tips include:
- Always pay your bills on time and in full. Set up automatic payments whenever possible so you never miss a payment.
- Lower your debts as much as possible.
- Maintain a healthy credit utilization of under 30 percent. This means if the total credit available to you in a month is three credit cards with a maximum balance of $5,000 each (so $15,000 total), your credit usage per month should not exceed $5,000 total.
- Avoid hard inquiries on your credit, especially back to back.
You need a FICO score of at least 500 to qualify for a mortgage, although many lenders require an even higher score of at least 620. However, individuals with a credit score in the “good” range of 670 to 739, can expect to see more favorable terms, including lower interest rates.
It’s important you shop around until you find the loan that works best for you—don’t just go with the first offer you get. Additionally, don’t assume you have to go with the bank or credit union where you do most of your banking.
While it’s common to assume you should go with one of the “big banks,” make sure to consider credit unions too. A credit union often charges fewer fees and is willing to work with individuals who have lower-than-average credit scores.
When you’re shopping around, let the financial institutions know so they can be more competitive in their offering. Gather a few rates and ask your primary bank or credit union if they can give you a better rate. Your main bank has a relationship with you and will often want to keep you as a customer, so they may be more willing to meet a competitor’s rate.
Have a consistent work history
When lenders are giving you a mortgage or approving your mortgage refinance, they consider your work history. A long work history that includes several years with the same employer and a steadily growing income shows reliability, which means that lenders will have more trust that you’ll be able to make your payments.
Conversely, switching employers or careers—such as opting to become self-employed—can signal more risk to your lender. If you’re about to refinance your mortgage, consider staying with your current employer until your mortgage is approved.
Seek a shorter loan
A shorter loan term usually comes with lower interest rates. This is because you’re returning the money to the lender at a faster rate. So, while your monthly payments will be higher on a shorter loan term, you’ll ultimately save money on interest in the long run. If you can afford it, consider a 10-year or 15-year mortgage term.
Make sure to set a realistic budget so you commit to a loan term you can afford.
Request a mortgage modification
The only way to change your mortgage without refinancing is with a mortgage modification. However, a mortgage modification is only meant for people who are going through financial hardship. If you’re behind on your payments or know you’re about to fall behind, a mortgage modification may be one answer.
With a mortgage modification, your lender may modify your mortgage by:
- Giving you a longer loan term
- Reducing your principal balance
- Lowering your mortgage rate
Again, this option isn’t for everyone. You’ll have to prove your financial hardship to the lender, and that can negatively impact your credit score.
There are pros and cons to refinancing a mortgage. On the one hand, refinancing costs money, as you’ll have to pay refinancing closing costs. You’ll also need to have some home equity established. But it can ultimately save you more money in the long run. Keep an eye on interest rates. If interest rates drop significantly, do the calculations to see if refinancing is worth it for you. The general rule of thumb is that refinancing might be worth it if you can decrease your interest rate by one percent or more.
No matter what approach you take to lower your mortgage interest rate, it’s almost guaranteed your credit will play a factor. Your credit history and credit score show how reliable you are as a borrower. The better your score, the more likely a lender is to approve you with better terms. Always work to lower the interest rate on your mortgage in whatever way works best for you, because it will be worth it and can save you thousands over the years.
from a Credit Expert