How to Get the Lowest Interest Rate on a Home Loan: Your Guide to Saving Big

Hello Hampton Roads,

One of the most common questions I hear from buyers today is "How do I get the lowest interest rate on a home loan?" Buying a home is a major milestone in a person's life emotionally and financially!  It's usually the biggest financial decisions you'll ever make so putting yourself in the best position to buy makes sense. Getting a low-interest rate on your mortgage can save you thousands over the life of the loan. Did you know that every 1% drop in interest rates increases your buying power by about 10%? Let’s dive into some proven methods to help you snag the lowest interest rate on a home loan.

1. Boost Your Credit Score

Your credit score plays a huge role in determining your mortgage interest rate. Lenders use tiered credit scores, with the top tier getting the best rates. For example, if the top tier starts at 740, then a score of 740 or higher will get you the most favorable rates. Here’s how to improve your credit score:

• Pay Bills on Time: Consistently paying bills on time boosts your score.
• Reduce Debt: Lowering credit card balances can enhance your score.
• Avoid New Credit Inquiries: Limit applications for new credit to keep your score high.
• Check for Errors: Regularly review your credit report for mistakes and dispute any inaccuracies.

2. Shop Around for Lenders

Different lenders offer different rates for the same or similar products. This is known as price dispersion. The CFPB did a study showing that buyers could save up to $100/mo by choosing cheaper lenders. Do your research and compare mortgage rates from various sources, including banks, credit unions, and online lenders. Use comparison websites to easily see multiple offers and choose the best one.

3. Consider the Loan Term

Shorter-term mortgages generally come with lower interest rates. While a 30-year mortgage might have a higher rate, a 15-year mortgage can offer a lower rate and save you money in interest, despite higher monthly payments. 

4. Increase Your Down Payment

A larger down payment reduces the lender’s risk and can result in a lower interest rate. Talk to your lender about the sweet spot between downpayment and rates. The more you put down will lower your monthly payment and also help you avoid private mortgage insurance (PMI) and secure a better rate.

5. Work those Relationships

If you have an existing relationship with a bank or credit union, use it to your advantage. Financial institutions often provide better rates to loyal customers. Don’t hesitate to ask for a rate discount based on your history with them.

6. Opt for Points

Buying points means paying an upfront fee to lower your interest rate. Each point typically costs 1% of the loan amount and reduces the interest rate by about 0.25%. Calculate if paying points will save you money over the loan term. Again shop around.

7. 3-2-1 or 2-1 Temporary Buy Down

A temporary buy down allows you to pay a lower interest rate in the initial years of the mortgage. With a 3-2-1 buy down, your rate is reduced by 3% the first year, 2% the second year, and 1% the third year. A 2-1 buy down reduces the rate by 2% the first year and 1% the second year. This can make your mortgage more affordable initially while you adjust to the payments. New construction builders typically offer to pay for buy downs to entice buyers.  Should rates drop during the buy down period, you can always refinance into a lower rate if it makes sense!

8. Opt for an Assumable Loan

An assumable loan allows a buyer to take over the seller's existing mortgage with its current interest rate. If interest rates have risen since the original loan was issued, this can be a great way to secure a lower rate. Ensure that the loan is assumable and meet the lender's criteria for assumption and note that you will still have to credit qualify for the assumption and pay for any difference between the assumed loan and asking price. You can get a my free report on loan assumptions here.

Final Thoughts

Securing the lowest interest rate on a home loan requires strategic planning and effort. By improving your credit score, shopping around, considering shorter loan terms, increasing your down payment, leveraging existing relationships, buying points, considering a temporary buy down, and opting for an assumable loan, you can save significantly over the life of your mortgage.

Ready to take the next step in your home buying journey?

Feel free to share this article with anyone looking to buy a home, and leave a comment if you have any additional tips or questions! Ready to take the next step? Schedule a free home buying consultation with me  here. 

Thanks for Reading,

 

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