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How Can I Get the Lowest Mortgage Rate Possible?

June 27, 2023

lowest rate possible

If you’re looking to purchase or refinance, you will ask any lender, “What is your interest rate?”. This is the best place to start when gathering information about getting the lowest mortgage rate as you enter the real estate financing marketplace.

We will discuss how to understand market interest rates and how to get the best mortgage interest rate on your home application. We will cover topics such as things you can’t control with mortgages, things you can control, if you should you wait to buy or refi, and how to use your home to create new life opportunities.

Things You Can’t Control With Mortgages

You have the ability to focus on numerous factors that can help you secure the best rates, but there are certain aspects of mortgages that are beyond your control.

What the Interest Rate Market is Doing

In 2021, a 30-year fixed-rate mortgage rate was 2.5%. This was for a top-tier, highest credit score borrower getting a $500,000 loan with 20% down. 12 months later, the 30-year fixed-rate mortgage loan rate for the same borrower was 7%.

The interest rates in 2021 were due to the government driving down interest rates during Covid. The 2022 market rates were also due to government intervention. This time it was due to too much market stimulus, which drove inflation.

A great mortgage application doesn’t equal low rates. Market timing is the primary factor of how low of a mortgage interest rate is available.

To best understand the trend in mortgage interest rates, follow the bond market. The 10-year US Treasury yield has long been the benchmark for mortgage rates. If the yield is decreasing, so are mortgage rates. If the yield is increasing, then so are mortgage rates. Treasury Yield 10 Years (^TNX) Charts, Data & News – Yahoo Finance

Things You Can Control With Your Mortgage

Once you understand the timing of the mortgage market, start optimizing the things you can control. These things will be the key to helping you find the lowest rates possible.

Credit Score

The best rates in the mortgage market are available to borrowers above a 780 FICO score. This change is new as of May 1st, 2023. Previously that threshold was 740.

The pricing improves every 20 points in the credit score range. While plenty of good home loans are available for good credit and below-average credit, the rate is slightly different. A borrower with a 700 credit score will receive one rate, while a borrower with a 720 credit score will get a slightly better rate. This will continue in 20-point increments up to 780. You can see how important it is to have good credit.

You can learn more about what makes up your credit score and the differences between a good and a great credit score.

Larger Loan Amounts

It takes the same paperwork to process a $600,000 mortgage as a $100,000 mortgage.

Larger loan amounts typically come with better interest rates due to reduced risk for lenders, increased profit potential, longer repayment periods, and economies of scale. So, the rates on a larger loan size tend to have better rates.

Shorter Terms

You may want to ask about a 15-year fixed product to get a lower mortgage rate. The rate for a 15-year is always lower than the rate on a 30-year fixed-rate home loan. Shorter loan terms often have a lower rate than longer-term loans.

Purchasing a home using a 15-year fixed rate is rare. However, many people refinance into one when their mortgage balance gets lower. This helps them to pay off their home faster.

Larger Down Payments

Part of what makes up a mortgage rate is the pricing risk, which shows up in the form of an interest rate. With a larger down payment, there is lower risk.

The best rates for a down payment usually come at 25% down, which carries the lowest risk. This has increased from a 20% down payment as of May 1st, 2023.

Negotiate With the Seller to Buydown Your Mortgage Rate

Ask the seller of your purchase to pay discount points to decrease your interest rate. This will get a lower rate on your home loan.

A discount point is a closing cost that can be charged by a lender to obtain a lower interest rate. This cost is usually 1% of the loan amount and can be paid by either the buyer or the seller.

For example, you are buying a home for $300,000 and financing $240,000 at an interest rate of 6%. The house needs the HVAC serviced soon. Instead of asking the seller to service the HVAC, you negotiate a “buy down” of your interest rate from 6% to 5.25%. This will cost the seller $2,400.

Shop Around and Compare Interest Rates

Shop mortgage lenders. While lenders aren’t too different in costs and rates due to government regulation, differences do still add up so it is important to compare. Any money saved is money earned. At Homestead Financial Mortgage, it costs nothing out of pocket to apply. Be careful not to pursue a transaction that seems too good to be true. The terms often won’t be true. As we mentioned above, take some time to compare rates and find the best one for your situation.

If Mortgage Rates Are Too High, Should I Wait?

The answer is no.

If you’re looking to purchase a home and are currently renting, your interest rate is 100%. When you rent, you’re not only paying the landlord’s mortgage, but you’re also paying to put a roof over your head. We’ve put together some great resources by county that can break down the cost of waiting.

What happens to buyers when mortgage rates drop? People think that they can get more house for the money when actually they will be paying more money for the house. This means properties will get bid up over the listing price. Once a home is sold over list price, you can’t get that money back.

In what is already a seller’s market, home prices have been going up despite mortgage rates climbing. So, when mortgage rates begin to drop, home prices will go up even further.

Marry the House, Date the Rate

There is a saying in our industry, “Marry the house, date the rate.” This means finding the home you love because you aren’t married to the mortgage. You can refinance to get a lower mortgage interest rate whenever rates go down.

It is a fact that rent goes up over time. Conversely, a mortgage payment will usually decrease over time with a well-timed refinance.

In 5 to 10 years, you will most likely have the same home. However, in 5 to 10 years, you most likely will not have the same mortgage. We usually see that the mortgage used to buy the home has been refinanced in that time frame. Homeowners typically refinance to get a lower payment or to take advantage of another opportunity.

Possible Opportunities with Equity

The largest asset we will ever own will be our home. In purchasing a home, you will be buying an asset that increases in value, unlike many of our life purchases. This increase in value also increases your equity.

This equity can be used as collateral for a loan for anything, like buying a vacation home or starting a business. Homestead Financial Mortgage was created, in part, by refinancing a home and using the cash to start the business. This was 25 years ago!

In Conclusion

There are many things you can do to help you get the best mortgage rates in the market. You can work on these while shopping for a new home or once you’ve purchased and are looking to refinance.

You should not wait for the “right” market to get a new home. It’s important to remember that you can always refinance to get a lower mortgage rate payment later. If you wait, you may miss opportunities that having equity can bring.

"By being open and recognizing our strengths and weaknesses, we can see opportunities for growth and ways to help each other."

- Jayson Hardie on Growth

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