A year ago, the benchmark interest rate for 30-year fixed-rate mortgages was 3.78%. In the second week of February, it was 4.27%. Rates have been inching up, and the Federal Reserve Board is likely to gradually increase interest rates further. Thus, if you're thinking of buying a home, sooner is better.
Whether you buy that new home within a few months or a few years, though, there are actions you can take in order to land the lowest possible interest rate. Low rates are very worthwhile, as they can save you a lot of money.
Here are three tips for landing a low mortgage rate:
Tip No. 1: Have a strong credit score
One of the most powerful ways to get offered low interest rates is to have a high credit score. Lenders want to know that you're a good credit bet, so they place a lot of importance on it when they decide what interest rate to offer you. If your score isn't very high, it can be worth spending some time beefing it up before starting the homebuying process. Three key ways to increase your score are fixing errors in your credit record, paying bills on time, and reducing your overall debt load.
First, though, to appreciate the kind of difference your credit score makes in the interest rates you're offered, consider sample rates from the folks at FICO, which generates the most frequently consulted scores. When I checked recently, they showed that if you were borrowing $200,000 via a 30-year fixed-rate mortgage and you had a top FICO score in the 760 to 850 range, you might get an interest rate of 3.88%. That would give you a monthly payment of $941 and total interest paid over the 30 years of $138,735.
If your score was 630, though, your rate would be very different, at 5.47%, with a monthly payment of $1,132 and total interest of $207,364. That's $191 more per month ($2,292 per year) and a whopping $68,629 more in interest.
FICO Score |
APR |
Monthly Payment |
Total Interest Paid |
---|---|---|---|
760-850 |
3.879% |
$941 |
$138,735 |
700-759 |
4.101% |
$967 |
$147,945 |
680-699 |
4.278% |
$987 |
$155,378 |
660-679 |
4.492% |
$1,012 |
$164,471 |
640-659 |
4.922% |
$1,064 |
$183,087 |
620-639 |
5.468% |
$1,132 |
$207,364 |
Here's another eye-opener: To appreciate how rising interest rates can hurt you, note that only a few months ago, the top FICO scores could get you an interest rate of 3.3%, a monthly payment of $880, and total interest paid of $116,717. Today's higher rate will cost you $732 more per year and more than $22,000 in total interest paid. Worse still, if interest rates keep rising and are, say, around 6% when you ink your loan, you could be looking at monthly payments of $1,200 -- costing you $3,000-plus more each year.
Tip No. 2: Shop around
It might seem like an obvious recommendation to shop around for the best interest rate you can get, but surprisingly few borrowers do so. According to a 2016 Consumer Financial Protection Bureau and National Mortgage Database report based on a 2013 survey of mortgage borrowers, a whopping 81% of borrowers applied to just one lender, while 51% considered only one.
A little time spent shopping around can help you get a better rate. As the table above suggests, seemingly small differences in interest rates can actually make a big difference in the long run, as mortgages involve big balances and long payment periods.
Different lenders use different calculations when they evaluate your creditworthiness and decide what interest rate to offer you. Check with your own bank(s) first, as they may give you a bit of a discount on the interest rate because you're a customer.
But check with other banks, too -- and with credit unions, which often sport lower interest rates. You might also consult a mortgage broker. They often offer a wide range of loans and can be especially helpful if you have an underwhelming credit record. A visit to Bankrate.com can help you zero in on the best rates in your area and beyond.
Tip No. 3: Know the lowest rate may not cost you the least
Finally, be careful when deciding what type of mortgage to get. One with a lower interest rate won't necessarily serve you best. When it comes to 15-year loans vs. 30-year loans, you'll typically be offered a lower rate for the shorter term. That can make a 15-year loan well worth it, as you'll pay off your home faster and you'll pay far less in interest, too.
But 15-year loans have significantly higher monthly payments. If you think that will stretch you too thin, consider buying a less costly home -- or opting for the 30-year loan. A great workaround, if you can be disciplined, is to get a 30-year loan regardless, and one that lets you make extra payments on principal without any penalties. If so, you can send in bigger payments each month -- ones that approximate a 15-year loan -- and you'll pay off the loan sooner. Plus, if life throws you a curve ball, you can always revert to paying just the lower minimum amount.
Meanwhile, you might also consider an adjustable-rate mortgage (ARM). An ARM will typically charge you a very low rate for the first three, five, or seven years, before starting to be adjusted annually according to prevailing rates. If you're not planning to be in the home long, an ARM could serve you best in today's low-interest-rate environment, as it will lock in low rates for a few years.
If you think you'll be in the home for decades, though, it can be better to lock in a low rate for the entire long life of the loan -- especially because interest rates seem likely to rise. As you pursue getting pre-approved for your mortgage, look into the exact kind of mortgage you want.
These are just some of the many ways you can get the lowest mortgage interest rates. Read up on the topic more, and you'll find additional ways, such as paying off other debts before applying in order to have a lower debt-to-income ratio -- or paying some "points" in order to lower your rate. A little research and action can potentially save you tens of thousands -- or even hundreds of thousands -- of dollars.