by Christy Bieber | Aug. 20, 2020
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With a 15-year mortgage, you pay off your home faster while keeping borrowing costs down. Here's how to get the lowest 15-year mortgage rate.
A 15-year mortgage loan can be a great option for homebuyers hoping to become debt-free as soon as possible. You'll pay off your loan in half the time of the more popular 30-year mortgage, and will generally qualify for lower rates because you're borrowing for a shorter amount of time. That can make total repayment costs much lower.
There is a big downside with a 15-year mortgage loan, though -- you'll have much higher monthly payments. To make sure you're saving as much as possible on interest and keeping your monthly costs as low as you can, it's important to find the lowest 15-year mortgage rate.
This guide will help you get that rate. There are five key steps to take to score the most affordable mortgage loan possible.
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Your credit score is a key determining factor in loan eligibility and your interest rate. It's imperative to get your score as high as it can be to get the lowest loan rate possible. So check your credit history and score to see where you stand.
If you notice mistakes on your report, correct them before applying for a loan. If there's a late payment, write a goodwill letter and ask your lender to remove it. And if your score is lower than it should be because your credit utilization ratio is high, pay off debt to raise it.
By getting your credit in great shape before applying for a loan, you can qualify for the most competitive rate.
Lenders look beyond your credit when determining loan eligibility and interest rate. They also want to see that you have a stable job, have plenty of income to repay your loan, and have assets in the bank. If you can't check any of those boxes, you'll probably want to wait to apply for a loan.
A larger down payment makes you a less-risky borrower because you have more equity in your home. It also means you borrow less, which helps reduce the cost of your mortgage.
If you want the best interest rate, saving at least a 20% down payment is a good idea. If you can save a little more, you'll be even more attractive to lenders, who should be eager to give you a loan at a great rate.
If your goal is the lowest interest rate possible, you may want to buy discount points. Buying points allows you to essentially prepay interest to reduce your rate. Each point costs 1% of your loan's value, and reduces your rate by 0.25%. So for example, if you bought a $100,000 home and your rate is 3.25%, you might be able to pay $1,000 to buy one point and reduce your rate to 3%.
It takes several years to recoup the cost of buying points. You'll need to figure out how much the interest savings reduce your monthly payment to see how long it takes to recoup the cost. For example, a $100,000 loan at 3.25% for 15 years would have monthly payments of $703. The same loan at 3% would have a monthly payment of $691. You'd save $12 a month. So to recoup your $1,000, you'd need to make 84 monthly payments. You'd have to be in your home for seven years to break even for paying the point up front.
You can do this math with your own loan to see if buying discount points is the right move -- but it will lower your interest rate, so it can be a good idea if your goal is to pay the least interest over time.
Finally, shopping around to find the best mortgage lender is key. Compare mortgage rates and terms from at least three banks, credit unions, or online lenders, because there can be wide variation in interest costs, fees, and other loan terms.
The good news is that most mortgage lenders will allow you to get pre-approved and find out your loan rates without a hard credit inquiry, so shopping around will not hurt your credit score. You'll just need to provide some basic financial information.
Once you've shopped around, compare loan terms carefully, and look not just at interest rate, but also whether the loan is a fixed or variable rate, whether you're required to pay points, and what the lender's origination fees and other costs are. You'll also want to make sure there are no prepayment penalties, so you can pay your loan ahead of schedule if you want.
After you find a lender offering the best deal, you can complete the application process and get an affordable 15-year loan that enables you to get out of debt on your home ASAP.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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