How to Get the Best Mortgage Rate

Beyond the listing price of a home, your mortgage interest rate plays an important role in shaping your monthly payments. A higher rate means a greater portion of your monthly budget goes toward interest, possibly limiting the price range of homes you can realistically afford.

As interest rates may seem beyond your control, you actually have more power than you think. By taking the right steps, you can qualify for the best mortgage rates, helping you increase your purchasing power and potentially save thousands over the life of your loan.

A mortgage rate is the interest charged by a lender on the money borrowed to purchase a home. It’s expressed as a percentage and directly affects the total cost of your loan and your monthly mortgage payments.

Mortgage rates can be fixed, staying the same for the entire loan term, or variable, changing over time based on market conditions. Factors like your credit score, loan type, down payment, and current economic trends all influence the rate you’re offered.

Having knowledge of your mortgage rate is important when purchasing a house since it enables you to compare loan offers, anticipate long-term expenses, and make more informed financial decisions. You may save (or lose) thousands of dollars over the course of your mortgage with even a slight rate differential.

Setting yourself up for success from the start is key if you’re planning to apply for a home loan. The best mortgage rates don’t just happen—they’re earned through smart financial planning and preparation. According to Josh Moffitt, CEO of Silverton Mortgage, securing a great rate depends on three main pillars: credit score, income-to-debt ratio, and available assets.

One of the first steps to take is to get pre-approved for a mortgage, which can give you a clear idea of wher0.

e you stand financially and what rates you can expect. This initial step not only provides clarity but also positions you to take advantage of the best rates available when the time comes to apply.

Here’s a 9-step process on how to get the best mortgage rates and save thousands over the life of your loan:

1. Boost Your Credit Score

Your credit score plays a major role in determining your mortgage interest rate. The higher your score, the lower your interest rate is likely to be. While a score of 620 may qualify you for a conventional loan, scores above 740 are typically rewarded with the best rates.

Tips to raise your credit score:

• Pay all bills on time
• Reduce credit card balances below 30% of your credit limit
• Dispute any errors on your credit report
• Avoid opening or closing credit accounts before applying

A strong credit profile signals that you’re a low-risk borrower, exactly what lenders are looking for.

2. Maintain Stable Employment and Income

Lenders prefer borrowers with at least two years of continuous employment, ideally with the same employer. This proves income stability and reliability.

What you’ll need to show:

• Recent pay stubs (last 30 days)
• W-2 forms from the past two years
• Proof of bonuses or commissions if applicable

Self-employed applicants may need to provide additional documentation like tax returns, profit-and-loss statements, and business licenses.

3. Save for a Larger Down Payment

A larger down payment reduces the lender’s risk and often leads to a lower mortgage interest rate. If you can put down 20% or more, you can avoid private mortgage insurance (PMI), which can cost between 0.46% and 1.50% of your loan amount annually.

4. Know Your Debt-to-Income (DTI) Ratio

Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. A lower DTI ratio makes you more favorable in the eyes of lenders.

Ideal DTI targets:

• Housing expenses: ≤ 28% of gross income
• Total debt: ≤ 36% of gross income
• Maximum allowed: 43% to 45%, depending on loan type
  
  
  

5. Check Different Loan Types and Terms

Not all mortgage products are created equal. Choosing the right type of loan can significantly affect your mortgage rate.

Options to consider:

• 15-year fixed-rate mortgage: Higher monthly payments, but lower interest rates and faster payoff
• Adjustable-rate mortgage (ARM): Lower initial rate, ideal if you plan to sell or refinance soon
• FHA, VA, and USDA loans: Government-backed loans with favorable terms for eligible buyers

Matching the right loan type to your situation can lower your total borrowing costs.

6. Buy Mortgage Points to Reduce Your Rate

Mortgage points, also known as discount points, are fees you pay upfront to reduce your mortgage interest rate. Each point costs 1% of your loan amount and normally lowers the rate by 0.25%.

Example: On a $400,000 loan, one point costs $4,000 and could reduce your interest rate from 7% to 6.75%.

Is it worth it? Only if you plan to stay in the home long enough to recoup the upfront cost, usually around 5 years.

7. Look for Special Discounts and Assistance Programs

Take time to research homebuyer assistance programs in your state or county. These may offer reduced interest rates, grants for closing costs, or down payment support for eligible buyers.

Also, some lenders offer rate discounts to customers who hold accounts with them. Promotions, limited-time offers, or partnership programs can further reduce your borrowing costs.

8. Compare Offers From Multiple Lenders

The best way to secure a competitive mortgage rate is to shop around. Request quotes from at least three to five lenders, including banks, credit unions, and online mortgage companies.

Key things to compare:

• Interest rates
• Closing costs
• Loan fees
• PMI premiums

Even a small rate difference can translate into thousands of dollars in savings over the life of the loan.

9. Lock In Your Mortgage Rate

Once you’ve found a rate you’re happy with, ask your lender about a rate lock. This protects you from interest rate increases while your loan is being processed.

Rate lock durations generally range from 30 to 60 days and may come with a small fee. But in a volatile market, it can save you big.

You might already know the importance of comparing mortgage rates, but have you ever considered just how much money it could save you over time? Even small reductions in your interest rate can result in significant long-term savings, especially on a large loan like a mortgage.

Take a look at the example below to understand the impact of rate changes on a $350,000 loan for a 30-year fixed-rate mortgage.

*Estimates include principal and interest only. Taxes and insurance not included.

Small Rate Drops = Big Savings

As shown above, reducing your mortgage rate by just 0.25% can save you thousands of dollars each year and tens of thousands over the full loan term. For instance, going from 7.5% to 6.5% could lower your total repayment by nearly $85,000, a huge win for your financial future.

By taking smart steps to boost your credit, minimize debt, compare lenders, and explore available programs, you can position yourself to qualify for a lower mortgage rate and maximize your savings over time.

As you can take steps to improve your personal financial profile, not every factor that affects your mortgage rate is within your control. Lenders consider several broader economic indicators when determining interest rates. Here’s a breakdown of these major influences:

1. Inflation

The purchasing power of the U.S. dollar declines when inflation rises. This pushes up prices across the board, including the cost of borrowing. Mortgage rates often increase during periods of high inflation as lenders adjust rates to protect their returns. Inflation also tends to cool down home loan demand, leading lenders to raise rates further.

2. Bond Market Trends

Mortgage rates closely follow the performance of the 10-year U.S. Treasury yield. This is because long-term fixed mortgage loans are influenced by similar market forces. When the 10-year Treasury yield increases, mortgage rates typically rise in tandem.

3. Overall Economic Conditions

Strong economic growth often leads to higher mortgage rates. Why? Lenders seek higher returns when the economy is booming and consumer confidence is high. On the other hand, during a slowdown or recession, lenders may lower rates to encourage more borrowing and keep the housing market moving.

4. Lender-Specific Risk Strategies

Every lender has its own internal guidelines for pricing risk. Factors such as economic outlook, investor expectations, and portfolio goals can all impact how a lender sets its rates. This is why two different lenders may offer different rates on the exact same mortgage application.

The current mortgage rates offer a general benchmark, but the rate you actually qualify for depends heavily on your personal financial profile and the loan type you select.

To get a clear picture of your lowest potential mortgage rate, use an online mortgage calculator to estimate your monthly payments. It’s also a good idea to contact lenders directly or browse their websites to explore current offers on various loan types, such as fixed-rate mortgages, adjustable-rate mortgages (ARMs), FHA loans, and VA loans.

Lenders evaluate your eligibility by analyzing your debt-to-income (DTI) ratio, which measures your monthly debt obligations (like auto loans and credit cards) against your gross income. This ratio plays a key role in determining how much mortgage you can afford. Another factor lenders closely consider is your loan-to-value (LTV) ratio, the comparison of your loan amount to the property’s market value. A lower LTV often positions you for more competitive interest rates.

Your mortgage options depend on several key factors such as credit score, employment history, and debt-to-income (DTI) ratio, to name a few. Based on these, lenders may offer you one of three main types of home loans: prime, subprime, or Alt-A mortgages. Here’s an explanation of each type:

Prime Mortgages

Prime loans are reserved for borrowers with strong credit and financial stability. According to the Consumer Financial Protection Bureau (CFPB), prime borrowers usually have credit scores of 660 or higher, although exact requirements may vary by lender.

A 10% to 20% down payment is often required of prime mortgage candidates in addition to having a high credit score. By lowering lender risk, a larger down payment increases your chances of obtaining favorable interest rates, which can result in thousands of dollars in savings over the course of your mortgage. 

Prime loans also meet guidelines set by Fannie Mae and Freddie Mac, two government-backed entities that help keep the mortgage market liquid by purchasing loans from lenders. These “conforming” mortgages are the most common and tend to come with the most favorable terms.

Subprime Mortgages

Subprime mortgages cater to borrowers with lower credit scores, basically in the 580 to 619 range. Because of the increased risk, these loans come with higher interest rates and often less favorable terms.

Many subprime mortgages are adjustable-rate mortgages (ARMs). These loans start with a low introductory rate,known as a teaser rate, and then shift to a variable rate based on market conditions. A common example is the 2/28 ARM, which has a fixed rate for two years, followed by 28 years of adjustable rates. Once the initial period ends, monthly payments often rise sharply.

As subprime loans provide access to homeownership for those with less-than-perfect credit, they also carry a higher chance of payment shocks and default if rates rise significantly.

Alt-A Mortgages

Alt-A loans, also known as Alternative A-paper mortgages, fall between prime and subprime in terms of risk and borrower profile. They are commonly low-documentation or no-documentation loans, meaning you don’t need to provide full proof of income, assets, or expenses to qualify.

Because of this relaxed documentation, Alt-A mortgages have been criticized for enabling inflated income reporting, especially leading up to the 2008 housing crisis, earning them the nickname “liar loans.”

Interestingly, Alt-A borrowers often have credit scores above 700, yet may receive approval with small down payments, high loan-to-value (LTV) ratios, and flexible DTI thresholds. These loans can be a fit for self-employed individuals or freelancers with strong income streams but inconsistent pay documentation.

Given their increased risk, Alt-A loans normally have interest rates higher than prime loans, but lower than subprime mortgages.

As we look ahead to 2025, many housing market analysts suggest that mortgage rates may remain steady, likely hovering between 6% and 7% for a significant portion of the year. However, the direction of mortgage rates will largely depend on one key economic factor: inflation.

Currently, inflation remains above the Federal Reserve’s long-term goal of 2%, which makes it difficult for interest rates to come down significantly. As long as consumer prices continue to rise faster than expected, the Fed is unlikely to cut rates aggressively, which in turn keeps mortgage rates at elevated levels.

For rates to meaningfully drop, we’d need to see a sustained slowdown in inflation, along with clear signals from the Federal Reserve that monetary policy is shifting toward easing. Until then, borrowers should plan for relatively high mortgage rates and monitor inflation reports, as they play a direct role in shaping the cost of borrowing.

In today’s market, securing a 4% mortgage rate is highly unlikely for most borrowers. Since early 2023, the average rate on a 30-year fixed conventional loan has generally remained above 6.5%, making a 4% offer well below the current standard.

However, there are strategic ways to access lower mortgage rates, even if 4% remains out of reach. One approach is to opt for a shorter loan term, such as a 15-year mortgage, which typically offers lower interest rates compared to longer-term options.

For example, let’s say you’re considering a $350,000 home with a $35,000 down payment and a 30-year mortgage at 6.5%. Your monthly payment might be around $2,592. But if you adjust your budget and go for a $280,000 home with a 15-year loan at 5.5%, your monthly payment would be nearly identical, around $2,585. In this case, you’d pay off your home 15 years faster and save significantly on interest.

As a 4% rate may be out of reach in today’s climate, loan term flexibility and budget adjustments can still help you secure a lower mortgage rate and long-term savings.

Once you’ve secured the best mortgage rate, the next step is choosing the right loan offer and formally applying. Here’s an overview of what you can expect throughout the closing process:

1. Receive Your Loan Estimate

After submitting your mortgage application, your lender will provide a Loan Estimate within three business days. This document outlines the key details of your mortgage, including the interest rate, monthly payment, and estimated closing costs. Remember, these are estimates, not final numbers, so there could be some variations. If anything seems unclear, don’t hesitate to reach out to your lender for more information.

2. Undergo the Underwriting Process

Once your loan estimate is received, your application will move to underwriting. During this stage, your lender will assess your financial profile to decide whether to approve your mortgage. You may be asked for additional documentation, so be prepared to respond promptly. It’s crucial to maintain your financial stability during this period, avoid applying for new credit cards, making large purchases, or switching jobs to ensure your approval stays on track.

3. Wait for Mortgage Approval

You’ll move closer to closing if your application is approved. However, if your mortgage is denied, ask the lender for specific reasons behind the decision. If necessary, you can reapply with a different lender right away, but it may be beneficial to wait a few months to avoid negatively impacting your credit score.

4. Review Your Closing Disclosure

As your closing date approaches, you’ll receive a Closing Disclosure. This document will provide the finalized details of your mortgage, including the interest rate, loan terms, and closing costs. It’s important to verify that the numbers align with what was initially quoted to you in the loan estimate. Since rate locks typically last only a short time, work closely with your lender to ensure there are no delays before your closing date.