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Taking out a mortgage is expensive. If you want to borrow money to purchase a home, you have to first come up with a down payment and cover the closing costs on the loan. Then comes the most expensive part of borrowing: the interest you pay to the lender each month.
Want to drastically lower the cost of borrowing? The best way to do that is to secure a low interest rate up front. Yes, finding a mortgage with low APR can be challenging in the current market, but you have several ways to bring your rate down.
1. Start working on your credit
Your credit scores play a big role in the rate you get. Most lenders will approve you with credit scores of 620 or higher, but the best mortgage rates are reserved for borrowers with scores of 760 and up, according to FICO.
If you want to build excellent credit, you may need several years of on-time debt payments and may even have to stick to a tight budget so you can reduce your high-interest credit card and loan balances. In other words, some borrowers will need to start working on this step well in advance of house shopping.
If you’re struggling to make serious improvements to your credit scores or unsure where to start, consider getting one-on-one advice from a credit counselor certified by the National Foundation for Credit Counseling. Get connected with a counselor by completing a form on the NFCC’s site.
2. Increase your down payment
Increasing your down payment will help you qualify for better rates. A down payment of at least 20% is usually required to avoid paying private mortgage insurance (PMI) on conventional loans, but you don’t necessarily need that much. In fact, the average down payment was just 13.6% in the first quarter of 2024, according to Realtor.com.
Still, any increase in your down payment can help you get lower rates and reduce your loan amount. Here are some ways to save more:
Earn interest. For the funds you’ve already saved, earn interest on them by depositing them to a CD or Treasury bill that will mature before you buy.
Consolidate or refinance. Now that interest rates are dropping, consider consolidating or refinancing your loans to reduce your monthly payments and free up money for your down-payment fund.
Ask for a gift. Ask a loved one if they can help you achieve your goal by contributing to your down payment. According to the National Association of Realtors (NAR), 9% of buyers used a cash gift to help them buy a home in 2024. The gift could be particularly helpful for those on fixed incomes and people whose families will inherit the property they’re gifting money for.
What is private mortgage insurance?
PMI is insurance that protects your mortgage lender from loss if you default on your loan or aren’t able to repay what you borrow. You’ll typically pay PMI on conventional mortgages when your down payment is less than 20% of your home’s purchase price. If you put down less, you’ll pay PMI until you’ve built at least 20% equity in your home, after which you can request your lender to remove your PMI responsibility.
Dig deeper: Buying a home in retirement: Pros, cons and weighing your options
3. Wait for rates to drop
You can make all the right moves to prepare for homebuying, but if market rates are high, you’ll inevitably end up with a high interest rate. Mortgage rates are dropping to 24-month lows as of late September and are expected to keep falling, but it’s still impossible to match what lenders offered in 2022.
Here’s how the average rate has changed over the last few years, according to Freddie Mac:
Yes, a 1% drop in mortgage rates can save you a significant amount, but waiting for rates to fall by 2% or 3% can be even more worthwhile. For example, if you borrow $400,000 at 3% APR instead of 6% (with no PMI), your monthly payments will be $712 lower and you’ll pay $256,245 less in interest over 30 years.
4. Reconsider the cosigner
Experts often recommend applying with a cosigner to reduce your mortgage rate, but the results can be mixed. If your cosigner has a better borrower profile than you — including higher income and less debt — you could qualify for better rates.
However, you may be better off having your cosigner apply alone. Why? Because lenders use the lowest of the two applicants’ credit scores to determine the loan terms. A 2016 study showed that for couples where one partner had a credit score below 740, 25% would have significantly reduced their borrowing costs if the higher-scoring partner had applied alone.
If you’re not sure how much you could reduce your rate by submitting a joint versus single application, ask the lender to show you the numbers for each scenario.
5. Compare multiple offers
When interest rates are high, different lenders will offer the same borrower a wider variety of rates. As a buyer, that means you have big potential to save money by comparing offers from multiple lenders.
How much could you save? According to a long-term study of homebuyer data from Freddie Mac, homebuyers who obtained just two rate quotes during high-interest periods could have reduced their borrowing costs by as much as $600 a year. If they had gotten at least four quotes, they could have saved at least $1,200 a year — or $36,000 over 30 years.
Also ask about autopay discounts. Many mortgage lenders offer a small interest rate reduction of around 0.25% if you commit to automatic payments.
6. Do the math before buying points
Some lenders give you the option to buy «points» in order to reduce your interest rate. One point typically costs 1% of your loan amount. Research indicates that points don’t necessarily save you money, so each borrower should look at the numbers on their loan before going this route.
Points are most likely to save you money under these circumstances:
The lender offers a high discount rate per point (rates generally range from 0.125% to 0.25%).
You will still have enough cash for at least a 20% down payment and your closing costs.
The points are not rolled into the loan financing (which would turn them into debt).
Before forking over cash for a discount, ask the lender to show you a comparison of your total borrowing costs, with and without points included. And make sure you’ll stay in your new home long enough to benefit from the upfront cost.
Dig deeper
Can you negotiate a mortgage rate?
Yes, certain costs involved with your mortgage are negotiable, including your interest rate. You’re more likely to have a successful negotiation if your credit scores are high, you have a large down payment and you’ve received a better preapproval offer from another lender.
Here are the costs that you can usually negotiate with your lender:
Interest rate. Use a lender’s advertised rate as a starting point, asking about available discounted or special rates.
Closing costs. Some lenders and sellers will compromise on closing fees. And don’t forget to shop around for homeowners insurance for the best deal.
Application fee. This one-time fee is often negotiable, especially if it’s separate from origination or processing fees you’re already paying the lender.
Origination fee. You might be able to get your lender to lower or waive this underwriting cost that can range from 0.50% to 1.00% of your total loan amount.
Underwriting or processing fees. These fees can be a part of or separate from origination fees but cover similar costs associated with reviewing your documents, filing paperwork and determining your loan terms.
Rate-lock fee. Even if you can’t negotiate the initial fee to lock in a rate, if there’s a delay requiring an extension, you can ask to waive any additional fees.
Title insurance. You can negotiate with the lender or seller to pay a portion of this fee.
Real estate agent commission. It’s as simple as asking if there’s room to lower this fee.
Fees paid to the government — like taxes or recording fees — can’t be negotiated, and fees the lender pays to third parties for appraisals, title transfers or recording fees are usually non-negotiable too. But it doesn’t hurt to ask.
What factors go into your mortgage rate?
Each lender offers a set range of rates based on market conditions and their internal policies. When you apply for a loan, the lender takes a thorough look at your finances before determining where you fall within that range.
Here’s what typically qualifies a borrower for the best mortgage rate available:
Credit scores of 760 or higher
Low debt-to-income ratio — or your debt in comparison to your income
A down payment of 20% or more
At least two years of uninterrupted employment history
Can I get a mortgage as a retiree on a fixed income?
Yes, but mortgage lenders will look at your fixed income differently from somebody’s full-time income. However, lenders can’t deny you simply because you have a fixed income or because of your age.
You’ll need to prove that you have enough money to cover loan payments, with retirement accounts, Social Security, annuities and trusts and any paid consulting or side gigs all counting toward what lenders consider “income.”
If your income is too limited for lenders, you may simply have to get creative in order to make a mortgage work. For example, you might need to consider downsizing to a smaller, more affordable property.
For more flexible loan requirements, try a lender who offers bank statement loans, which consider your cash assets as part of the approval process. The Federal Housing Authority (FHA) also offers specific loan assistance for seniors.
FAQ: Mortgages, savings strategies and your finances
Learn more about how to save money on your next mortgage to find the best fit with your finances.
Is it better to get my mortgage from a bank or a credit union?
Banks are a popular choice for mortgages, with big brands offering mortgage options that range from fixed-rate conventional loans to government-backed loans and jumbo loans. But if you’re able to join a credit union, you might find lower interest rates, lower fees and even relationship discounts that come with membership. Shop around with at least three mortgage lenders, including a mix of banks and credit unions, to find the best rates and terms for your budget.
What happens to my mortgage after I die?
Your home’s mortgage isn’t treated the same as your other debt, which is typically settled through your estate before any assets are passed along to your heirs. Most mortgages aren’t transferable, which means the home must be paid off in full to transfer the property title.
But that also means only those who signed on to the loan can be held liable for a mortgage. Learn more about what happens to your mortgage after death.
Should I take on a 15-year mortgage to lower my interest rate?
If you’re able to take on the higher monthly payments that come with a 15-year mortgage, a shorter loan term could be worth it for the interest savings alone. But you’ll want to be sure you can afford the more expensive payments with enough wiggle room to balance your other financial priorities.
Here’s a comparison of different loan terms at a handful of interest rates for a $300,000 loan:
I want to give a down payment to a loved one. Will I need to pay a gift tax?
For tax year 2024, the IRS excludes gifts of up to $18,000 from gift taxes per recipient. “Per recipient” is key, because it means you can gift up to $18,000 to each of your children in a tax year, for example, without triggering the gift tax. And if you’re married, both you and your spouse can gift up to $18,000 to the same recipient for total gifts of up to $36,000 per recipient. Talk with a tax professional or a trusted retirement advisor if you’re gifting more than the allowable amount or looking for other ways to minimize your tax liability.
Sources
Home mortgage rate comparison, FICO. Accessed September 26, 2024.
Down Payment Share Reaches Q1 High, but Down Payments Fall From Historical Peak, Realtor.com. Accessed September 26, 2024.
FEDS Notes, Board of Governors of the Federal Reserve System. Accessed September 26, 2024.
When Rates Are Higher, Borrowers Who Shop Around Save More, Freddie Mac. Accessed September 26, 2024.
2024 Home Buyers and Sellers Generational Trends Report, National Association of Realtors. Accessed September 26, 2024.
About the writer
Sarah Brady is a finance writer and educator who covers a wide range of topics, from personal and small business credit and loans to financial scams. Her expertise has been featured in Yahoo Finance, Forbes Advisor, CNN, Fortune, Investopedia and other top media brands. As an NFCC-certified credit counselor, Sarah taught workshops on money management and coached thousands of clients on how to improve their credit. She is also a former HUD-certified housing counselor and educator for the City of San Francisco’s affordable homebuyer programs.
Article edited by Kelly Suzan Waggoner
