The Mabnol : How to Lower Your Mortgage Interest Rate

Getting a lower mortgage interest rate can save you a lot of money. If you've already bought a house, you may be able to refinance your home at a lower interest rate. If you haven't bought one yet, you can take a few steps to get the lowest interest rate possible. If you're just wanting to lower your mortgage payment, you can also take steps to do that without refinancing your home.

EditSteps

EditRefinancing Your Home to Lower Interest Rates

Choose a time period with lower interest rates. Watch the market to see how the interest rates are going up and down. When the market reaches rates that are lower than what you're paying, that's a good time to refinance.^[1]
Pick a fixed-rate rate over a variable one. When you refinance, make sure you choose a fixed-rate mortgage. If you are currently on a variable-rate mortgage, your rate goes up and down with the market, costing you more. However, if you can lock in a lower amount, you'll save money over the long term.^[2]
Shop around. Most of the time, different banks are going to give you different rates. You'll need to talk to several banks to see which one offers you the best rate for your refinancing.^[3]
Talk to your lender about your loan. If you are in danger of missing a payment or you've just missed one, call your lender. Oftentimes, they can work with you to modify your mortgage using federal programs without refinancing, but they can also help you to refinance your loan if you're eligible.^[4]
Check your savings. When you refinance, you're likely to run into a number of fees, such as an application fee, origination fees, appraisal fees, and so on. You also need to pay fees like the closing costs again. So make sure you discuss with the lender ahead of time how much money you'll need to have in hand.^[5]
- Application fees tend to run $250 USD to $500 USD, while an appraisal can be up to $600 or more. The loan origination fee will run you 1% of the total cost of your loan. Document fees, flood certification, title search and insurance, and recording fees can run you as much as $1,250 or more together.
Use a mortgage calculator to figure out how amortization will affect you. Amortization refers to how your payments are applied to your loan. In the beginning, a much higher percentage is applied to interest than is applied to the loan amount. When you get a new loan, amortization starts over, so it can increase your costs over the life of the loan.^[6]
- For instance, if you started with a $150,000 30-year loan at 7% interest and 20% down payment, your monthly payments would be about $800 per month on principal and interest, and you'd pay close to $400,000 over the life of the loan.
- If you refinance $100,000 of that loan after 10 years at a 6% interest for another 30 years, you'd pay about $600 a month and about $280,000 over the life of the new loan, but you've already paid about $100,000 in the 10 years, meaning you'd actually pay $380,000 for the house overall. It does save you money, but there might be instances where it doesn't, particularly when taking into account the possible $3,000 to $6,000 in closing costs.
Apply with your prefer lender. Once you've decided to refinance, work on the process with your preferred lender. You'll have to go through a lengthy process with paperwork, just like when you bought your house the first time. You'll need all the original paper work on hand, as well as current pay stubs and bank statements, if you're not financing with the same bank you have your checking account with.^[7]

EditGetting a Lower Interest Rate When You're Buying a Home

Improve your credit. Your credit is one of the biggest factors in determining your interest rate. If you have poor credit, you can take steps to make it better, but it will take time. Many credit card companies offer free credit scores, and you can request free credit scores on a variety of websites, such as Credit Karma.^[8]
- Check your credit report for anomalies, as any mistakes on your report could be costing you. You can appeal any mistakes with the credit agency. You'll need to report it in writing to the credit agency and the creditor.^[9]
- Pay down your credit card debt. Your credit card debt contributes to your credit score. The lower your debt is in ratio to your credit (what you can use), the better.
- Stay current on payments, as late payments can create dings on your credit score.^[10]
Make a higher down payment. A higher down payment, one closer to 20%, will usually earn you a lower interest rate than a lower down payment. However, even a 10% down payment is better than nothing.^[11]
- If you have a 5% down payment on a $150,000 loan, you might get a 5% interest rate or higher. In that case, you'd pay $760 (on principal and interest) per month and $370,404 over the life of the loan.
- However, if you're buying a home at $150,000 and you put down 20%, you might be able to get an interest rate of 4% instead. In that case, your monthly payment will be about $575 (principal and interest), and you'll pay $312,743 over the life of the loan.^[12]
Compare rates. Many banks will offer you different rates, so it's a good idea to get quotes from multiple banks. You'll need to get "pre-qualified" by giving the bank information, but it can help in the long run so you can see which is the better deal.^[13]
- Try to do these all at once, as it will be less of a hit on your credit score.^[14]
- Keep in mind that rates are constantly fluctuating, so watch the market rates before applying.
Pay for points on a long-term loan. With this system, you pay a certain percentage of the mortgage to reduce your interest rate by a small amount. This step can be beneficial if you plan to keep your home for a long time, but it will not likely help if you plan to move quickly.^[15]
- For instance, you might be able to pay $2,000 to lower your interest rate from 4.25% to 4.125%. On a loan for $150,000 with a 20% down payment, that can lower your payment from $590 a month principal and interest and $319,018 over the life of the loan to $582 a month and $315,869 over the life of the loan.

EditLowering Your Mortgage Payment

Extend the length of your loan. If you're just looking to lower your payment, you have a few other options. You can make your loan longer, adding 10 or 15 years onto it, which will make the payment lower per month. Of course, that means you'll pay more over the life of the loan, but if you can't afford your payments, this option is a good one.^[16]
- Most lenders will do this without refinancing, but they'll likely charge you a fee. Call your lender to find out if they can help you.
- For instance, if you have $80,000 left on your loan and 10 years, you could extend that to 20 years. With a 4% interest rate, that could change your payment from nearly $1,000 to closer to $650. However, you'll pay about $150K over the life of the loan instead of closer to $115K.^[17]
Check on your property taxes and make an appeal if necessary. In some cases, you may be paying more property taxes than you need to be, if the county has assessed your property for more than it's worth. For instance, if you have a room that isn't heated or cooled, that shouldn't be included in property taxes. However, sometimes, it gets roped in.^[18]
- Ask for the county's assessment, and check the details to see if they're correct. If not, you can appeal it with the county and possibly pay lower property taxes.
Ditch your PMI. If you didn't make a 20% down payment when you bought your home, then your lender required that you to get private mortgage insurance (PMI). The idea is that it helps protect the lender from financial loss. However, if you now have more than 20% equity in your home, you can likely ditch it. Talk to your lender about how much equity you have and whether you are able to remove the PMI.^[19]