Updated: Nov 21, 2024

Getting the best mortgage rate can save you thousands over the life of your loan. Whether you’re a new home owner or have lived there for years – discover ways to secure the lowest rate possible!

When it comes to mortgages, even a small difference in interest rates can make a huge impact on how much you pay each month—and how much you pay in total by the end of your loan. But how do you make sure you’re getting the lowest rate possible? In this post, we’ll cover the key factors that affect mortgage rates, what lenders look for when setting your rate, and simple strategies you can use to improve your chances of locking in the best deal.

What Affects Mortgage Rates?

Mortgage rates aren’t set in stone—they fluctuate based on a variety of factors, both within your control and outside of it. Understanding what goes into determining your mortgage rate can help you prepare and position yourself to get a better deal.

Here are the main factors that influence mortgage rates:

1. Credit Score

Your credit score is one of the most important factors that lenders consider when deciding your mortgage rate. The higher your credit score, the lower your interest rate is likely to be. This is because a higher credit score signals to lenders that you’re less of a risk and more likely to repay your loan on time.

2. Loan-to-Value Ratio (LTV)

The loan-to-value ratio, or LTV, is the amount you’re borrowing compared to the appraised value of the home. The lower your LTV ratio, the better your chances of securing a lower interest rate. This is why it’s generally recommended to save for a larger down payment—putting down 20% or more can make a big difference in your mortgage rate.

3. Loan Term

The length of your loan (term) also plays a role in determining your interest rate. Shorter-term loans, like 15-year mortgages, often come with lower interest rates than the standard 30-year mortgage. While your monthly payments will be higher with a shorter-term loan, you’ll pay less interest over time.

4. Economic Factors

Mortgage rates are influenced by broader economic trends, such as inflation, the Federal Reserve’s interest rate decisions, and the overall health of the economy. While you can’t control these factors, you can keep an eye on market trends and try to time your mortgage application when rates are low.

5. Location

Where you’re buying a home can impact your mortgage rate, too. Some states or regions tend to have higher or lower rates depending on local housing market conditions. It’s worth researching what the average mortgage rates are in your area so you can compare offers effectively.

How to Improve Your Chances of Getting the Best Rate

While you can’t control the economy, there are several steps you can take to improve your financial profile and secure a better mortgage rate. Let’s dive into some practical tips.

1. Boost Your Credit Score

Since your credit score plays a huge role in determining your mortgage rate, improving it can significantly increase your chances of getting a better deal. Here are a few strategies to help boost your credit score:

• Pay off existing debt: Reducing your credit card balances and other debt will improve your credit utilization ratio, which can have a positive impact on your score.

• Make all payments on time: Late payments can stay on your credit report for years and negatively affect your score. Setting up automatic payments can help you avoid this.

• Check your credit report for errors: It’s a good idea to request a free copy of your credit report and look for any mistakes. If you spot any inaccuracies, disputing them could help improve your score.

• Avoid opening new credit accounts: Each time you apply for new credit, it results in a hard inquiry on your credit report, which can temporarily lower your score. Try to hold off on opening new accounts before applying for a mortgage.

2. Save for a Larger Down Payment

The larger your down payment, the lower your loan-to-value ratio will be, which can help you qualify for a better mortgage rate. A 20% down payment is typically the target, but if you can save more, you might secure an even lower interest rate. Plus, if you put down less than 20%, you may be required to pay for private mortgage insurance (PMI), which adds to your monthly costs.

3. Shop Around for the Best Rate

One of the most effective ways to find the lowest mortgage rate is to shop around and compare offers from multiple lenders. Rates can vary from one lender to another, even for the same type of loan, so getting quotes from different banks, credit unions, and online lenders can help you find the best deal.

Here’s what you can do to make the comparison process easier:

• Get pre-approval from multiple lenders: This will give you a clear idea of the rates you qualify for based on your financial situation.

• Use online mortgage rate comparison tools: Websites like Bankrate, NerdWallet, and Zillow allow you to compare rates from multiple lenders quickly and easily.

• Ask about lender fees: In addition to the interest rate, make sure to ask about any origination fees, points, or other closing costs that could affect the overall cost of your loan.

4. Lock in Your Rate

Once you’ve found a mortgage rate you’re happy with, ask your lender about locking it in. Rate locks protect you from market fluctuations, ensuring that the interest rate you were quoted stays the same for a specified period—typically 30 to 60 days. If rates go up during that time, you won’t be affected. Some lenders even offer “float-down” options, which allow you to take advantage of lower rates if they drop before you close on your home.

5. Consider Different Loan Types

There are several different types of mortgage loans available, and choosing the right one can help you secure a better interest rate. Here’s a quick overview of common loan types:

• Conventional Loans: These are the most common type of mortgage and typically offer competitive rates, especially if you have good credit and can make a large down payment.

• FHA Loans: These government-backed loans are designed for first-time homebuyers or those with lower credit scores. While FHA loans can come with higher mortgage insurance premiums, they often offer lower interest rates.

• VA Loans: If you’re a veteran or active-duty military member, a VA loan might be the best option for you. VA loans often have lower rates and don’t require a down payment or mortgage insurance.

• Adjustable-Rate Mortgages (ARMs): ARMs offer lower interest rates during the initial fixed-rate period (usually 5 or 7 years), after which the rate adjusts periodically. ARMs can be a good choice if you plan to sell or refinance before the rate adjusts, but they come with more risk than fixed-rate loans.

Timing Matters: When to Apply for a Mortgage

Just like the housing market, mortgage rates fluctuate throughout the year. While you can’t predict the future, here are some general timing tips to help you get the best rate:

• Monitor the market: Keep an eye on interest rate trends by following financial news or using rate tracking apps. If rates are trending downward, it might be worth waiting to lock in your mortgage.

• Time your application with your financial health: The stronger your credit score, the better rate you’ll qualify for. If your credit needs improvement, consider waiting until you’ve boosted your score before applying for a mortgage.

• Consider the season: Historically, mortgage rates tend to dip in the winter months when the housing market slows down. If you’re flexible with your homebuying timeline, shopping for a mortgage in the off-season could help you get a better deal.

Final Thoughts

Securing the lowest mortgage rate is all about preparation and timing. By boosting your credit score, saving for a larger down payment, shopping around, and locking in a rate at the right time, you can significantly reduce your monthly payments and the overall cost of your mortgage. Don’t rush the process—take the time to compare your options and make sure you’re getting the best deal for your financial situation.