7 Ways to Lower Your Loan Rate by 1% or More

If you are looking to buy a home, you probably know that housing availability is in the dumps. Record high prices and high mortgage rates provide a double whammy for those looking to buy everywhere.

A recent CNET poll found that half of US adults would seriously consider buying a home or refinancing an existing mortgage if rates fell to 4% or less. But most mortgage forecasts don’t even have average rates falling below 6% by 2025.

But average mortgage rates are, well, average. Depending on your financial situation, the rate you qualify for could be much lower than what lenders advertise. A 1% difference in your loan rate can save you hundreds of dollars each month and tens of thousands of dollars over the life of your loan.

You cannot control the market forces that affect loan rates. However, improving your credit score and negotiating with multiple lenders can help you get a lower than average rate on your future home loan.

What is considered a ‘good’ mortgage rate?

Historically, a good mortgage rate has often been at or below the national average. The 30-year mortgage rate since 1971 has averaged 7.72%, according to Freddie Mac. Over the past year, mortgage rates have generally fluctuated between 6% and 7%.

With that in mind, getting a rate in the low 6% range is great, according to Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage.

But affordability is related to your overall financial situation. And because loan rates can change daily and even hourly, the definition of a “good” rate can change quickly.

“What matters is the rate you can get today,” says Colin Robertson, founder of The Truth About Mortgage. According to Robertson, the only way to know if you’re getting a good deal is to talk to several different lenders and brokers, then compare their quotes against daily or weekly rates.

Read more: Still chasing a 2% Mortgage? Here’s Why It’s Time To Let Them Go

What effect does a 1% difference have on your monthly mortgage payment?

Lowering your mortgage rate by 1 point can make a significant difference in your budget, translating into savings of around 10% on your monthly mortgage payment.

For example, let’s say you buy a home for $400,000 and make a 20% down payment on a 30-year fixed-rate mortgage. The difference between the 7% rate and the 6% rate means a savings of $210 per month, which amounts to $75,748 saved over the life of the loan.

Here’s a quick look at how monthly mortgage payments compare for the same house with a 7%, 6% and 5% rate:

Save money on your mortgage with these 7 tips

Improving your credit score, increasing your down payment, buying points and negotiating your rate can help you save on your mortgage. Taking some (or all) of these steps can lower your ranking by 1% or even more.

1. Buy mortgage points

A mortgage point, also known as a mortgage discount point, is an upfront fee you can pay a lender to get a lower interest rate on your home loan. Nearly half (45%) of home buyers will use this strategy when applying for a mortgage in 2022, according to Zillow research.

Each point is worth 1% of the home’s purchase price and typically lowers the rate by 0.25%. On a $400,000 home, you would pay $4,000 for one discount point. The lender may even let you buy four points on the loan to lower the rate from 7% to 6%, though you’ll have to put down $16,000 to get there.

To check if this strategy is worth it, take the total cost of the points and compare it to the total monthly savings. In this case, if you pay $16,000 to buy four points and save $210 a month, it will take you more than six years to reach your break-even point.

2. Improve your credit score

Lenders look at your credit score to determine whether you qualify for a mortgage and the interest rate you receive. FICO credit scores range from 300 to 850, with 850 being the best possible score. High credit scores show that you have managed credit responsibly in the past, thus reducing your risk to lenders. This can help you secure a lower interest rate.

“The best loan rates and products are reserved for those with a credit score of 740 or better,” DeFlorio said.

If your credit needs work, consider taking steps to improve your credit score before applying for a loan. It can help you save more, according to Lending Tree’s 2024 study. When borrowers move from the “fair” credit score range (580 to 669) to the “excellent” range (740 to 799), they shave 0.22% points off their interest rate. That rate difference helped borrowers save $16,677 over the life of the home loan.

Still, Robertson said “it’s possible to get a good rate with a low score, and just shopping around can make a difference.”

3. Increase your down payment

Your down payment is the amount of money you can put down towards the purchase of your home. Each type of home loan comes with a minimum down payment, usually ranging from 0% to 5%, but a higher down payment can help lower your rate. That’s because the lender takes less risk when you contribute more to the loan.

Because a down payment lowers your rate and builds your home equity, some mortgage experts recommend making a larger down payment, about 20%, instead of buying a credit score. This is because if you sell the home or refinance before reaching your break-even point, you lose money. But the money you spent on your down payment becomes part of your equity.

4. Take out an adjustable-rate mortgage

An adjustable-rate mortgage, or ARM, is a home loan with a fixed amount for a fixed term, such as five years. Once that period is over, the interest rate can increase or decrease at regular intervals for the remainder of the term.

The main appeal of ARMs is that the introductory interest rate is often lower than the traditional mortgage rate. In November, the average rate for a 5/1 ARM was 6.19% compared to 6.79% for a 30-year fixed-rate mortgage.

5. Negotiate the amount of the loan

When you apply for a home loan, you don’t need to go with a company that does your pre-approval. In fact, research shows that getting rate quotes from multiple lenders and comparing offers can lead to significant savings.

If you want to use this strategy, start by submitting a loan application with lenders that match your criteria. Once you have several loan estimates in hand, use the best one to negotiate with the lender you want to work with.

The loan officer may lower your rate, help you save on closing costs or offer other incentives to help you get on board. In LendingTree’s 2023 survey, 39% of home buyers negotiated an interest rate on their most recent home purchase. Of that pool of buyers, 80% were able to find a better deal.

6. Choose a short term home loan

About 90% of home buyers choose a 30-year fixed-term loan because it offers more flexibility and an affordable monthly payment. The payments are smaller because they are stretched over a longer timeline, but you can always put more toward the principal here and there.

But when you take out a long-term mortgage, “you’re holding onto the borrower’s money, and there’s an opportunity cost for the money to be invested elsewhere,” says Nicole Rueth, SVP of the Rueth Team Powered by Movement Mortgage.

Shorter loan terms, such as 10- and 15-year loans and ARMs, have lower interest rates, so you can lower your rate now.

Choosing a shorter repayment period can help you save money as you will be paying less interest in the long run. But don’t make the home buying mistake of choosing a short term loan with a low rate. Shorter loan terms mean you’ll have less time to repay the loan, which leads to higher monthly payments, so it’s important to make sure it fits within your budget.

7. Determine the purchase price of temporary assets

Buying a short term loan involves making a down payment at closing to lower your interest rate for the first few years of your loan term. Because of the large upfront costs, this strategy only makes financial sense if someone is paying the money. Home builders, sellers and some lenders may offer to cover this type of purchase to promote sales, especially if market prices are inflated.

For example, the lender may offer a “3-2-1” purchase, where the interest rate is reduced by 3 percent in the first year, 2 points in the second year and 1 point in the third. From the fourth year, you pay the full amount for the term of the loan.

Buyers often choose short-term purchases and plan to refinance later. Your purchase funds are refundable, and you can use them to cover expenses when you re-install (if prices drop).

Should you wait for affordable mortgages?

Buying a home is a personal decision, so you should feel good about your situation and your budget. As you shop for a home, think of several strategies to downsize and focus on things that are within your control. A mortgage calculator can help you estimate what you will pay each month.

“If you’re comfortable with monthly payments, you don’t have to settle for a certain amount,” DeFlorio said. “Especially because if prices continue to rise, you may be paying a higher purchase price because you’re waiting.”

Also, the market is particularly uncertain right now, as the US prepares for a new presidential administration. Trying to time the market can backfire.

“It’s very easy to get it wrong,” Robertson said. “The decision to buy a home should go beyond the loan amount.”

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