Buying a house is one of the most exciting experiences of your adulthood, especially if it’s the first time you’ve bought one. But it can also be a stressful matter; a home is one of the most significant financial decisions you’ll make in life, and the choices you make during the process can affect your lifestyle and financial health for years to come.
One of the biggest variables to consider here is your home loan, or mortgage. In a typical mortgage, you’ll pay a fixed interest rate on your principal annually. Is there a way to get a lower interest rate for your loan?
How Much Does a Rate Matter?
First, let’s establish why your interest rate is so important. It matters more than most people think, thanks to the compounding effects of interest and the long-term nature of the loan.
The effects of an interest rate are best understood by example. Let’s say you’re buying a big house and you end up borrowing $400,000 at an interest rate of 4 percent. Over the course of a 30-year term, you could end up paying $287,478 in interest alone. Compare that to a $400,000 home loan with an interest rate of 3 percent; in this scenario, you’ll only pay $207,109 in interest, a net savings of more than $80,000.
This effect carries to nearly every conceivable mortgage situation. Even if you’re only borrowing a small amount, a reduction of your interest rate by a fraction of a percent should still be enough to save you tens of thousands of dollars over the term of your loan. The question is, how can you get that better loan rate?
Shopping for the Best Provider
Your first job is shopping for a different home loan provider. Different banks and lenders will be able to offer different rates and terms. Some may be able to provide you with a lower interest rate if your credit score is high enough, and others may have special incentives that allow you to score a lower rate. Don’t assume that your current bank will be able to get you the best deal; always be willing to look at your options.
Your Credit Score
In many cases, the interest rate you’re able to get will be variable, based in part on your existing credit score. You can improve your credit score in several different categories:
- Payment history. The biggest factor in your credit score is usually your payment history. Making consistent payments and making them on time is essential for a good or excellent score. Missed and late payments will work actively against you.
- Current accounts. Credit scores also consider your current accounts, and how much debt you have. If you have multiple credit cards and they’re all maxed out, you’ll have a lower credit score than if you have several thousand dollars of available, unused credit.
- Credit history length. The length of time you’ve been building credit also matters. It helps to have at least one account that’s remained open for several years, if not decades. There isn’t much control you can exert over this factor.
- Credit mix. What do your accounts look like? Do you have several high-interest credit cards? Or do you have a small handful of different accounts, including credit cards, car loans, and other accounts?
- Percent of new credit. Applying for lots of new credit in quick succession is typically considered a bad sign.
Your Down Payment
Your down payment may or may not affect the interest rate you pay on your loan, and it will certainly affect the amount you pay per month; offering a higher down payment will reduce both your principal and interest payments each month, and may help you forego the need to pay for private mortgage insurance (PMI), saving you even more money. Aim to save up to 20 percent of the total price of your home.
With larger financial institutions, lending practices may be set in stone; you may only qualify for a specific interest rate, based on your credit history and current circumstances. However, with some small- to mid-sized lenders, you may have some wiggle room for negotiation. It doesn’t hurt to ask for a lower interest rate, especially if your credit score is in a gray area between tiers.
Mortgage interest rates have significant power over how much money you eventually pay for your home. However, these rates are highly variable, and if you’re smart about it, you may be able to score yourself a lower rate. Shop around with different lenders, spend some time improving your credit score, save up a significant down payment, and don’t be afraid to negotiate. These strategies could ultimately save you tens of thousands of dollars.