If you’re a homeowner—or aspiring to become one—you’re probably aware that the interest rate on your mortgage is one of the most significant financial factors influencing the total cost of your home. Over the years, a small change in the interest rate can add up to thousands of dollars. However, there are various strategies that can help you save money on home loan interest rates. Whether you’re buying a new home or refinancing, these tips will show you how to take control of your loan and maximize your savings.
1. Shop Around for the Best Rates
Just like shopping for the best price on a car or a new TV, shopping around for the best mortgage rates is essential. Interest rates can vary widely between different lenders, so don’t settle for the first offer that comes your way. It’s a good idea to compare mortgage rates from multiple banks, credit unions, and online lenders.
One way to make this process easier is by using mortgage comparison websites. These sites allow you to enter basic information about your loan (like the amount you need, your credit score, and your down payment) and get a list of offers from different lenders. You might be surprised at how much rates can vary—even for the same type of loan!
Another key here is to get pre-approved by multiple lenders before you commit to one. This will give you a clearer picture of the rates available to you based on your financial situation. Plus, it can be a great negotiating tool when you’re ready to lock in your rate.
2. Improve Your Credit Score
Your credit score plays a huge role in determining your mortgage interest rate. In fact, even a slight improvement in your score can significantly lower the interest rate on your loan. For example, a borrower with a credit score of 620 may pay 1–2% more in interest than someone with a score of 740. That difference can add up to tens of thousands of dollars over the life of your loan.
So, before you apply for a mortgage, take steps to boost your credit score. Start by paying down high-interest debts, such as credit cards, and make sure you’re not missing any payments. Even small improvements in your score can make a noticeable difference in the rates you’re offered.
Also, remember to regularly check your credit report for errors. Sometimes, outdated or incorrect information can drag your score down, and fixing these mistakes can quickly improve your creditworthiness.
3. Consider a Larger Down Payment
If you have the savings, consider making a larger down payment on your home. While the standard down payment is usually around 20%, offering a larger down payment can help you secure a lower interest rate.
The reason? A larger down payment reduces the lender’s risk, because it means you’re borrowing less money relative to the home’s value. Lenders reward this with lower rates. Additionally, if your down payment is large enough, you may avoid paying private mortgage insurance (PMI), which can add hundreds of dollars to your monthly payment.
Even if you’re not able to put down a large down payment initially, it’s worth considering other ways to increase your down payment. For example, if you get a gift from family or tap into savings, it could make a significant difference in the rate you qualify for.
4. Opt for a Shorter Loan Term
It’s tempting to go for the lower monthly payments that come with a 30-year mortgage, but choosing a shorter term can help you save a lot of money on interest in the long run.
A 15-year mortgage, for example, often comes with a much lower interest rate compared to a 30-year loan. Although your monthly payments will be higher, you’ll pay off your mortgage faster and save thousands of dollars in interest over the life of the loan. In addition, you’ll own your home outright sooner, which is a great feeling!
If a 15-year mortgage doesn’t fit within your budget, even switching to a 20-year mortgage can provide better rates and save you money in the long term. The key is to find the balance between affordable monthly payments and long-term savings.
5. Consider Paying Points
When securing your mortgage, you may be offered the option to pay for discount points in exchange for a lower interest rate. One point usually costs 1% of the loan amount and can lower your interest rate by 0.25%. While this upfront cost may feel like a bit of a hit to your wallet, it could save you more in the long run if you plan to stay in your home for several years.
Let’s say you’re taking out a $200,000 mortgage and are offered the option to pay two points to lower your rate by 0.5%. That means you’d pay $4,000 upfront, but over the life of your loan, you could save thousands on interest payments.
Before committing to paying points, make sure you consider how long you plan to stay in the home. If you plan on moving in the next few years, it might not be worth the upfront expense. However, if you’re settling down for the long haul, paying points could be an effective way to save on interest.
6. Lock In Your Rate
Interest rates can be volatile, so it’s important to lock in your rate when you find a good one. Rate locks are offered by most lenders, and they ensure that the interest rate on your mortgage will stay the same for a certain period (usually 30, 45, or 60 days) as your loan goes through the approval process.
If you’re in a rising rate environment, locking in your rate can help you avoid future increases and ensure you’re getting the best deal. Keep in mind that rate locks are not free—they usually come with a small fee. However, if rates are expected to rise, the cost may be well worth it.
On the flip side, if rates are falling, you may want to avoid locking in too early. In such cases, discuss your options with your lender to see if they offer a float-down option, which allows you to take advantage of lower rates without having to restart the application process.
7. Refinance When Rates Drop
If you’re already locked into a mortgage but interest rates have dropped since you signed your loan agreement, refinancing may be a good option. Refinancing allows you to pay off your current mortgage with a new one, ideally at a lower interest rate. This can help you lower your monthly payments and reduce the overall cost of your loan.
Refinancing isn’t free—there are closing costs and fees involved—but if rates have dropped significantly since you bought your home, it may still be worth it. Just make sure you factor in the costs of refinancing and do the math to ensure it’s a financially beneficial move.
8. Check for Special Programs or Discounts
Some lenders offer special programs that may give you access to lower rates or other perks. For example, some programs are designed specifically for first-time homebuyers, while others are aimed at veterans or certain professionals, such as teachers and healthcare workers.
If you fall into one of these categories, it’s worth asking your lender about any discounts or incentives that might apply to you. These programs often come with lower rates or reduced fees, which can save you a significant amount of money over the life of your loan.
Additionally, check if your employer offers any home loan discounts or partnerships with lenders. Many employers have relationships with financial institutions that provide special offers to their employees.
9. Maintain a Stable Employment History
Your employment history can also impact the interest rate you’re offered. Lenders prefer borrowers with a stable job history because it signals reliability and financial stability. If you’ve recently changed jobs or have gaps in your employment, it could affect the rate you receive.
To put yourself in the best position for securing a low-interest rate, try to maintain a steady employment history before applying for a mortgage. Lenders like to see that you have a reliable income and that you’re financially stable enough to handle a long-term commitment.
By implementing these strategies, you can significantly reduce the amount of money you pay in interest over the life of your loan. Whether you’re shopping around for the best rates, improving your credit score, or refinancing, each step you take will help you get closer to your goal of saving money on home loan interest rates.
Remember, mortgage rates may fluctuate, but with a proactive approach, you can lock in a rate that helps you build wealth rather than drain your savings. Stay informed, make smart financial choices, and you’ll find that managing your home loan doesn’t have to be a costly burden.