How to Get a Lower Home Loan Interest Rate
If you’re interested in learning how to get a lower interest rate on your home loan, it might be worth going back to mortgage basics. This means brushing up on fundamentals like effective mortgage shopping, refinancing and ways to improve your financial profile for lenders. Let’s explore how you can improve your mortgage options and possibly secure a lower home loan interest rate.
Shopping for interest rates
When looking for a home loan, it might be helpful to shop around with different lenders to get the best rate for you. Mortgage brokers, regional banks, national banks and local credit unions tend to offer distinct loan products, each with their own rates and fees. Some lenders cater to new homeowners while others focus on refinancing. Comparing your choices and considering your personal financial situation might help to identify lenders and mortgage options that better align with your goals.
Your real estate agent might have suggestions too, though doing your own research is still generally helpful. Because loan rates can change frequently, home loan shopping within a shorter period might make comparison more effective. Remember to factor in any associated fees when calculating interest rates.
Improving your credit score
To a lender, your credit score is indicative of your risk as a customer – the lower the score, the higher the perceived risk. That’s why some lenders may charge higher interest rates to applicants with lower credit scores. Even if you already have a loan, improving your credit score may qualify you for better rates with a mortgage refinance.
Homeowners and homebuyers looking to build good credit will often review their credit report to check for any outstanding balances. Clearing debt and staying consistent with timely debt repayments is key to improving credit over time. It’s also generally a good practice to routinely look for and correct any errors on your credit report, as these can negatively impact your credit. While higher scores are generally helpful for securing lower interest rates, there are some affordable lending programs designed to make borrowing more accessible to those with lower credit scores.
Considering your loan term
Lenders tend to consider short-term home loans less risky, since they’ll recoup their money faster. As a result, shorter loan terms, such as a 15-year mortgage, often carry lower interest rates. However, since you have to pay off the principal in a shorter time, these loans typically have a larger monthly payment.
Despite the higher payments, short-term home loans can save you more money in the long run when you pay less interest overall. But long-term loans may leave you with more disposable income every month because you’re splitting your principal over more total repayments. If you’re looking specifically for low interest rates and increased savings over the life of your loan, a short-term loan might be your best bet.
Making a larger deposit
Making a larger deposit means more equity in your home loan from the start. Not only will it reduce the loan principal, but you’ll also pay less interest over the loan’s lifetime since interest is calculated on the principal owed. First-time homebuyers exploring ways to save for their first home might also qualify for down payment assistance from certain government programs.
Fixed interest rates
To potentially reduce the impact of interest rate changes, you may want to consider locking in your interest rate.
Keep in mind that while a fixed interest rate protects you from rising interest rates, it also rules out an opportunity to secure a lower interest rate.
Refinancing your mortgage
Refinancing is, essentially, replacing your existing loan with a new one that has different rates or terms. There are a variety of refinancing options available, each with its own pros and cons. Here’s how refinancing might save you money on your mortgage rate:
- If you’re concerned about an impending interest rate increase, consider refinancing your loan to a fixed interest rate. This allows you to make consistent monthly principal and interest payments.
- If you’re in a better financial situation than you were when you first applied for your home loan, you could potentially negotiate your fixed interest rate to a lower rate. This option is particularly relevant for people whose credit scores have increased or if overall lending rates have decreased. When refinancing a fixed interest rate loan, you may also be able to renegotiate the length of your loan to better suit your needs.
Many homeowners and homebuyers are eager to learn how to get the lowest interest rate. Financial strategies such as refinancing, making larger deposits or securing a fixed interest rate may be ways of lowering your current interest rate. Additionally, trying to improve your financial profile with better credit and lower debt can also help you qualify for better interest rate options.
Contact the Provide Finance team to book in a time to discuss how you can get a better rate.