Mortgage Rates Slide: Best Tips For A Low Rate

Mortgage rates are at their lowest levels of the year, with the average cost of a 30-year mortgage retreating to 6.63 percent as of Aug. 6, according to Bankrate’s national survey of lenders.

Yet, today’s rates still feel high, especially for the many Americans who long for the days of sub-4 percent mortgages. If you’re hoping to score the best possible rate right now, here are some possibilities.

Shop multiple rate offers

Don’t settle for the first offer you get. Compare quotes from at least three different lenders. This step alone can save you thousands of dollars over the life of your loan.

It’s not that one lender is trying to rip you off. Mortgages are such a complicated product that lenders can and do offer different deals to the same borrower on the same day. They generally use the 10-year Treasury yield as a benchmark for mortgage rates, but the rate each lender quotes you depends on a variety of factors, including their strategy and appetite for new loans.

“We’re all working off the same 10-year, but each lender is going to have slightly different rates,” says Chelsea Wagner, executive vice president at mortgage lender Lower.

Be ready to lock when rates dip

First things first: If you’re buying a home, you should do so because you’re emotionally and financially ready to, not necessarily because mortgage rates are falling.

“Trying to time the market is a really dangerous thing to do,” Wagner says. “If you qualify for the loan, and it’s something you can comfortably afford, then you should do it. We’ll see people missing out on their dream home over an eighth of a point.”

“A home is a quality-of-life decision,” not a purely financial call, says Bill Banfield, chief business officer at Rocket Mortgage.

However, there’s nothing wrong with paying attention to mortgage rates and locking in when they move in your favor.

“Sometimes a drop in rates doesn’t last very long,” Banfield says.

That mindset really matters if you’re looking to refinance your mortgage. Unlike buying a home, swapping to a new mortgage is all about timing the market.

Pay attention to your credit score

It isn’t exactly a secret that the best deals on mortgages go to borrowers with stellar credit scores. While both that concept and the exact amount of savings are public knowledge, it takes some sleuthing to figure out how your credit score translates to your mortgage offer.

To give one example, mortgage giant Fannie Mae uses credit scores in combination with loan-to-value ratios to determine borrowers’ mortgage rates. According to Fannie’s loan level price adjustment chart, if you have a credit score of 780 or higher, you’ll have no more than 0.375 percentage points added to your rate on a home purchase loan. However, if your score is below 640, you could have as much as 2.875 percentage points tacked on to your rate.

“Make sure you have the absolute best credit score you possibly can,” Banfield says. “It can have a pretty meaningful impact.”

Make a larger down payment

The second factor in Fannie’s loan level price adjustment is the loan-to-value (LTV) ratio. While 20 percent is the magic number for avoiding private mortgage insurance (PMI), if you want to avoid an add-on to your rate, the number is actually 25 percent. If you have an 800 credit score and a 20 percent down payment, you’ll still have to pay an extra 0.375 percentage point.

Fannie’s pricing schedule has dozens of options, so check with your loan officer or mortgage broker about whether it makes sense to bring extra cash to avoid an upcharge to your rate.

In another wrinkle, Fannie Mae and Freddie Mac give you a break on your rate if your down payment is less than 20 percent. In this case, you have to buy PMI, which lowers the lender’s risk but also boosts your monthly costs.

Consider a shorter repayment term

The 30-year mortgage is the most popular option because it offers the lowest monthly payment — but it also comes with a higher rate. While the average rate on a 30-year loan nationally was 6.63 percent as of Aug. 6, for 15-year mortgages, it was 5.79 percent.

There’s an ongoing debate over how best to use mortgage debt. From a financial perspective, maxing out your mortgage and investing in the stock market instead is often a winning strategy.

If you’re risk-averse, though, reducing the length of your mortgage can pay off big. A simple example: If you take a 30-year loan for $300,000 at 6.63 percent interest, you’ll pay $391,893 in interest over 360 payments. If you switch to a 15-year loan at a rate of 5.79 percent, you’ll pay $149,579 in interest over 180 payments — about $240,000 less over the life of the loan. The math shakes out similarly if you were to take a 25-year loan, or another term shorter than 30 years.

Think about paying points

Mortgage points are a fee you pay your lender upfront to reduce the rate on your loan. In exchange, you get a lower monthly payment and pay less interest over the term of the mortgage. The tactic is known as “buying down the interest rate” or a “buydown.” The points themselves are sometimes also called “discount points.”

“A point is nothing more than prepaid interest,” Banfield says. “If you’re going to be in that home five, seven, 10 years, paying points is a good decision.”

As borrowers clamor for the old days of super-low mortgage rates, they’re willing to pay points to lock in an appealing rate.

“We’re entering this zone where people want rates starting with a 5,” Banfield says. “There’s really a psychological event when rates get to that level. If they have to pay a point or a point and a half, they’re willing to do that.”