The average mortgage interest rate recently climbed to as high as 5.3%, according to the St. Louis Federal Reserve Bank, after hovering just above 3% only a few months ago. In other words, borrowing money for a home purchase continues to become even more expensive.
While interest charges are an inevitable part of any form of credit or loan — including credit cards, personal loans and car loans — there are still a few steps you can take to make sure you’re getting the lowest rate available and saving as much money as possible.
Improve your credit score
When applying for any new line of credit with a lower credit score, you’re likely going to receive a higher interest rate, which will make it more costly for you to borrow money. The same idea also rings true when it comes to applying for mortgages.
Remember that your credit score can provide lenders with clues as to how likely you are to repay borrowed money on time and in full — that’s why lenders see individuals with lower credit scores as being riskier borrowers and offer interest rates that are toward the higher end of the lender’s range.
Conversely, when you apply for a home loan with a higher credit score, you’ll be seen as a less risky borrower who is likely to repay the loan amount on time and in full. Lenders will then feel more comfortable offering a lower interest rate and it’ll be cheaper for you to borrow the money.
Paying your bills on time is the most important thing you can do to help raise your credit score. You should also try to keep your debt balance low and check your credit report regularly so you can dispute any potential inaccuracies that might be bringing your score down — credit monitoring services like Experian and IdentityForce® can help with this.\
Shop around for the best rate in your area
Mortgage interest rates can fluctuate depending on the market and national rates can provide a good ballpark estimate as to where your rate might lie. Keep in mind that the rate you’re likely to receive will depend more heavily on factors such as your specific location, credit score and credit report. While you can take a look at each lender’s website to get an idea of what interest rates they charge, the best way to get a solid idea of what you’ll have to pay is to provide the necessary information and check your rate.
That said, it’s important to submit your information and check your rate with more than one lender so you can have a better chance at securing the lowest rate possible. Don’t worry about your credit score getting dinged multiple times — when you apply for a mortgage, you can submit your information for a hard inquiry as often as you need to within a 45-day window without your credit score suffering for it.
While you may not always get a drastically low rate between lenders, even a small distinction can make a big difference in how much you end up owing in interest each month.
Consider a shorter loan term
15-year terms and 30-year terms are common for mortgage loans, meaning you’d have 15 years and 30 years, respectively, to repay the money you borrowed to buy your house. A 30-year loan typically gives you a longer time horizon to make payments, along with smaller monthly payments. Note that shorter loan terms typically carry slightly lower interest rates since you are agreeing to repay the loan over a shorter period of time.
RocketMortgage offers home loans with terms as short as eight years and as long as 29 years — this lender also offers Federal Housing Administration, or FHA loans, with down payments as low as 3.5%. Other lenders, such as SoFi and PNC Bank, offer terms between 10 years and 30 years. SoFi also offers a number of lending benefits — a $500 discount for SoFi members and up to $9,500 in cash back when you purchase a home through the SoFi Real Estate Center — that could potentially offset at least some of the interest you would pay even if you decide to go with a longer loan term.
Picking your term is an extremely important decision since there are advantages and disadvantages to going with a shorter term over a longer term. If you end up going with a shorter term, make sure the larger monthly payments that would inevitably come with it can fit into your budget.