Tips for Homebuyers to Get a Lower Mortgage Rate

With mortgage rates expected to remain elevated through most of 2024, buying a home might feel out of reach for many. But don’t give up on your dream yet!

There are a few ways you can snag a better mortgage rate and eventually save thousands of dollars over the life of your home loan. Let’s quickly look at them so you can apply for home loans online with confidence.

Understanding the factors that impact mortgage rates can help you find ways to secure lower mortgage rates. The primary factors are down payment, credit score, loan term, loan amount, loan type, market conditions, debt-to-income ratio, and the lender.

Saving for a larger down payment, improving your credit score, reducing your loan term, decreasing your debt-to-income ratio, and negotiating with your chosen lender can all help to secure a lower mortgage rate.

Save money for a larger down payment

The trick to lowering your mortgage rate is saving enough money for a larger down payment. The lender’s risk is reduced when you pay a larger down payment. Also, your loan-to-value ratio is reduced, which is another important factor lenders consider when granting mortgage loans.

You can save for a larger down payment by increasing your monthly income, investing in better savings channels offering higher ROI, creating and sticking to a budget, curbing unnecessary expenses, etc.

 

Reduce your DTI (debt-to-income) ratio

Improve your chance of securing a lower mortgage rate by lowering your DTI ratio. A lower DTI ratio is seen as a positive sign by lenders because it indicates your capacity to add a new mortgage payment to your current expenses and your penchant for balancing your financial situation.

It is generally recommended to aim for a DTI below 36%. You can achieve this by focusing on paying down debts and seeking ways to increase your income.

 

Boost your credit score

A good credit score is a surefire way to impress the lenders and coax them to offer you better mortgage rates.

If you have a good credit score, it shows lenders you are a reliable borrower. This automatically increases your chances of securing lower mortgage rates.

You can improve your credit score by maintaining low credit card balances, paying bills on time, curbing too many new inquiries to your credit, and keeping a close eye on your credit report for inaccuracies.

 

Opt for a shorter loan term

The most popular option is 30-year fixed mortgage rates. However, that might not be the best option for you.

Opting for a 15-year mortgage might get you a better rate instead.

Please note that the trade-off to getting a lower rate with a shorter loan means a much higher monthly payment. Make an informed decision after carefully weighing the pros and cons of this trade-off.

However, if you are able to afford the higher payments, paying off your loan quicker might be the smart solution, as you can snag the lowest mortgage rate.

 

Explore the adjustable-rate mortgage option

Again, the 30-year fixed-rate mortgage is the most popular type of loan among potential homebuyers. However, this doesn’t mean it is the best option for you.

As a matter of fact, you might want to explore adjustable-rate mortgages if the rates are too high.

As a rule of thumb, ARM products offer you a lower rate than the fixed option. Also, they are an attractive option because of their variable nature. Thanks to this, your rate might decrease if the market falls after your initial fixed period expires. So, if you are purchasing a home in a high-rate environment, the best option might be to take the ARM with the lowest rate.

 

Purchase mortgage points

Do you plan to own your new home for a long time? If so, a clever way to save money might be to buy mortgage points. Paid at the time of closing, each mortgage point is equal to 1% of your mortgage.

In return for these upfront payments, the rate of interest is reduced, and the monthly mortgage payments are smaller.

However, please keep in mind that it will take time to recoup your savings.

 

Consider refinancing your mortgage

Do you already have a mortgage? Refinancing your existing mortgage might fetch you a better deal. But this depends on the current mortgage rates and when you got your loan.

Refinancing refers to renegotiating your mortgage terms so you can save money over your loan’s lifetime.

However, carefully consider the current mortgage rates and the cost of refinancing before making a decision.

 

Compare mortgage lenders before making a decision

Comparing various mortgage lenders will help you get a better mortgage rate. As you invest time and effort searching various mortgage lenders, you’ll see the fees and rates differ widely from one lender to the next. You may stumble across banks offering rate discounts for current customers to award them for their loyalty.

So, shop around and ask for quotes from a variety of lenders. Once you get the quotes, compare them and be sure to negotiate with the lenders you shortlist.

 

Add a second signer

Sometimes, you can receive better mortgage rates by adding a second signer to your mortgage. The second party takes on the responsibility for a portion of the mortgage payment that is not paid by the primary borrower. This lowers the risk of default for lenders and allows you to get better rates. However, make sure the second signer has a good credit score.

Securing a lower mortgage rate is a beneficial move leading to substantial savings over the lifetime of your loan. The first step to getting a lower mortgage rate is understanding the factors that impact this rate, such as credit score, DTI ratio, loan terms, loan amount, and so on. Once you have gained a deep understanding of these factors, you can work towards securing a lower mortgage rate by improving your credit score, reducing your DTI ratio, increasing your income, buying mortgage points, adding a second signer, and so on. You can even consider refinancing if you have a mortgage.