Are you considering buying a home? Or are you already struggling to keep up with your monthly mortgage payments? If so, be mindful that paying off a mortgage is one of the more financially challenging tasks you’ll ever have to go through in your life. And we’re here to help!
While you will likely be stuck with mortgage payments for the foreseeable future, that doesn’t mean you should be penalized by unfavorable rates. In fact, by following our recommendations below, you could potentially be saving thousands of dollars in interest over the next few decades.
Here are 10 ways to lower your mortgage rate.
Improve Your Credit
Your credit score can either serve as a positive indicator to your mortgage lender or prove to be a red flag. Financial institutions don’t look kindly upon low scores. You’re better off with a FICO score ranging well into the 700s—if not 800s.
Check out your scores from Equifax, Experian, or TransUnion and—if they need work—start looking at ways to boost it. This could mean taking out a credit-builder loan or consolidating your debts. Realistically, there’s an array of methods to bolster this number and improve your mortgage rates.
Shop Around for Low Rate
Conducting due diligence is never a bad idea; at the same time, comparing mortgage rates has never been easier thanks to the convenience of the internet. It’s always a good idea to start with credit unions because they offer lower fees than banks.
Refinancing to a Lower Rate
With rates at historic lows, current homeowners with less-than-advantageous rates are rushing to refinance their mortgages. Earlier this year, Freddie Mac reported that $355 billion worth of refinance originations took place in the first quarter of 2020, up from just $125 billion in the first quarter of 2019.
Is now a good time to refinance?
Now is probably the most optimal time to refinance since mortgage rates are still near historic lows. Provided you’re paying 100 basis points-plus over current rates, now might be the right time to refinance.
Types of refinancing
Rate-and-term refinancing:
- Either the mortgage rate, the loan term, or both will be different from the original loan.
Cash-out refinancing:
- This method could offer a reduced rate or a shorter term than the original home loan.
- The primary purpose here is to increase the borrowing amount.
- Loan balances with the new mortgage are more than the original mortgage balance by 5%-plus.
Cash-in refinancing:
- Here, cash is brought to the closing. This pays down what’s owed to the bank and the loan balance.
- This option could lead to both a reduced rate and a shorter loan term.
When should you not refinance?
It’s likely unwise to refinance if there’s a lengthy period until you break even. After doing the math, if you’re paying more in the long run with this method, it’s strategically unsound.
Since mortgage rates are already historically low, it wouldn’t make sense to move to an adjustable-rate mortgage. And, as always, don’t consider refinanceunless you can afford the closing and administrative costs.
Reduce the Term of Your Mortgage
Generally, shortening your loan term lowers your rate. Consider looking into 10–15-year mortgages. To further illustrate this point, in October 2016, the average 30-year fixed mortgage rate was 3.45%. Conversely, the average 15-year fixed rate was 2.70%.
Increase Your Down Payment
There’s a caveat to putting down more money—you still must take out a sizable enough loan so that the bank doesn’t dial up the interest it charges to offset its ability to make a profit. More specifically, borrowing $100,000 may prove to be too little for the bank to be worthwhile while borrowing more than $400,000 may represent too much risk. For more expensive homes, find the sweet spot for your down-payment—it’ll lie between the dollar figures discussed above.
Ask Your Lender for a Better Rate
As the saying goes—if you don’t ask for a better rate, the answer is always no. Still, you’ll improve your chance of securing the most favorable rates by having a FICO score exceeding 800. Mortgage providers tend to bend over backward for people with exceptional credit.
Set up Automatic Loan Payments
Setting up automatic payments—if the option is available to you—helps ensure you’re never late on your bill. Some banks will even offer a better ongoing interest rate if you sign up for this option. Note that switching banks or accounts could result in your discount being lost.
Optimize Your Debt-to-Income Ratio
Your debt-to-income ratio is a percentage that compares your monthly debt payments to your monthly income. It gives lenders an insight into how well you manage your monthly debt and your ability to repay a loan.Keep this number optimized, and you’ll find yourself benefitting from favorable mortgage rates.
Wrapping Up
Remember, when refinancing to a lower rate, you might do well to consider using some of your equity to consolidate debt or to finance other projects. Unlocking the equity in your home can be useful for paying off high-interest debt, for investment, or for home improvements. Follow the above ten suggestions and a lower mortgage rate just may be in your future!
