Mortgage rates won’t drop significantly over the next few months, but you don’t have to postpone your home purchase plan.
The mortgage rates you see online are just based on the average of borrowers provided at a given time. Depending on your financial situation, you are eligible for lower interest rates. By taking steps to improve your credit score and negotiate with multiple lenders, you can ensure better deals.
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In other words, if your budget with a home loan ratio of nearly 7% is currently challenging, there are ways to reduce it to 6% without waiting a few years to enter the housing market.
Lower interest rates save you money
The 1 percentage point difference in mortgage rates can be translated into about 10% of monthly mortgage payments, saving tens of thousands of dollars in your loan process.
For example, suppose you buy a home for $400,000 and make a 20% down payment on a 30-year fixed-rate mortgage. The difference between a 7% interest rate and a 6% interest rate saves you $210 a month.
Here is a quick look at the monthly mortgage payments compared to the same home with interest rates of 7%, 6%, and 5%.
How to get cheaper mortgage rates today
Taking some (or all) of these steps can reduce your rates by 1% or even more.
1. Improve credit score
If your credit requires work, consider taking steps to improve your credit score before applying for a mortgage.
The lender checks your credit score to determine whether you are eligible for a home loan and the interest rate you receive. FICO credit scores range from 300 to 850, with 850 being the best score. A higher credit score indicates that you used to manage your debt responsibly, so it reduces your risk to your lender. This can help you ensure lower interest rates and save a lot.
“The best mortgage rates and products are usually reserved for people 740 or higher,” said Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage.
According to a 2024 loan tree study, when borrowers moved from the “fair” credit score range (580 to 669) to the “very good” range (740 to 799), they shaved 0.22% of the percentage points. This rate difference helped borrowers save $16,677 in their lifetime of home loans.
2. Increase down payment
Your down payment is the amount you purchased your home in advance. Each type of home loan comes with a minimum down payment, usually from zero to 5%, but a higher down payment means cheaper rates. That's because when you contribute more to your loan, the lender has less risk.
Since the down payment lowers your mortgage interest rate and builds your home’s net worth, home loan experts usually recommend a down payment of at least 20%.
3. Take out an adjustable interest rate mortgage
An adjustable interest rate mortgage or ARM is a home loan with a fixed interest rate in the introduction period (such as five years). Once it is over, interest rates can rise or fall regularly for the remaining period.
The biggest attraction of weapons is that entry rates are usually lower than those of traditional mortgages. Typically, the average 5/1 ARM rate in the first few years is about 0.5% lower than the average interest rate on a 30-year fixed-rate mortgage.
4. Negotiate your mortgage rate
When you apply for a mortgage, you don’t have to go with a company that has pre-approved. In fact, research shows that getting rate quotes from multiple lenders and comparing offers can lead to considerable savings.
If you want to use this strategy, first submit a mortgage application with a lender that suits your criteria. Once you have some loan estimates on hand, use the best loan to negotiate with the lender you want to work with.
Loan officers may lower your expenses, help you save on settlement fees or provide other incentives to get you on board. In the 2023 Lendingtree survey, 39% of home buyers negotiated interest rates in their latest home purchases. Of that batch of buyers, 80% were able to get better deals.
5. Choose a shorter mortgage term
Nearly 90% of homebuyers choose a 30-year fixed mortgage term as it provides maximum flexibility and monthly payment affordability. Payments are lower because they extend over longer schedules, but you can always put more principals here and there.
But when you take out a long-term home loan, “you are picking up the lender’s money and there is an opportunity cost to fund elsewhere,” said Nicole Rueth, SVP of Rueth Team, powered by a sports mortgage.
Shorter loan terms, such as 10- and 15-year mortgages and weapons, have lower rates, so you can now lower rates.
Choosing a shorter repayment period can help you save money because you will have less interest in the long run. However, don't just choose a shorter loan term with a lower interest rate. Shorter loan terms mean you will have less time to repay the borrowed money, resulting in higher monthly payments, so it is important to make sure they fit your budget.
6. Purchase mortgage point
A mortgage point (also known as a mortgage discount point) is a lower interest rate that you can pay the lender’s advance payment in exchange for a home loan. Nearly half (45%) of home buyers used this strategy when they obtained a mortgage in 2022, according to Zillow Research.
The price per point is 1% of the purchase price of the house, which usually reduces the tax rate by 0.25%. In a $400,000 home, you will pay $4,000 for a discount point. The lender can even let you buy four mortgage points to lower interest rates from 7% to 6%, although you have to spend $16,000 to get there.
To check if the strategy is worth it, calculate the total cost of points and compare it to the total monthly savings. In this case, when you pay $16,000 to buy 4 points and save $210 a month, you will take over 6 years to reach the breakeven point.
Some experts encourage any extra money you have to go to down payments rather than buying points. That's because if you sell your home or refinance before you reach break even, you're losing money. However, the amount of the down payment you pay becomes part of your interest.
7. Get temporary mortgage rate to buy
Buying temporary mortgage rates involves charging fees during the closure period to lower interest rates for the first few years of your loan term. Since the upfront cost is considerable, this strategy only makes sense if others pay this fee. Home builders, sellers and even some lenders may offer coverage of this type of buy to boost sales, especially when market prices rise.
For example, lenders may offer a “3-2-1” buy, where interest rates for the first year were cut by 3 percentage points, 2 percentage points for the second year and 1 percentage point for the third year. Starting from year 4, you will pay the full rate for the loan term.
Buyers often choose to buy temporarily and plan to refinance later. Your purchase funds are refundable and you can use them to close the fees when refinancing (if the rate drops).
6% is a “good” mortgage rate?
Most of us adults only consider buying a home if the fee is reduced to 4% or below. However, most collateral forecasts for this year's average do not predict an average of less than 6%.
Historically, good mortgage rates are usually below or below the national average. According to Freddie Mac, the average fixed mortgage interest rate for 30 years since 1971 is 7.72%. Last year, the average mortgage rate mostly fluctuated between 6% and 7%.
With that in mind, the acquisition rate in the mid-to-high 6% range is pretty good.
But affordability is related to your overall financial situation. And, since mortgage rates can change every day or even hourly, the definition of a “good” rate can change quickly.
“What matters is the ratio you can get today,” said Colin Robertson, founder of the truth about the mortgage. Robertson believes that the only way to know if you get a deal is to talk to some different lenders and brokers and then compare their quotes to the daily or weekly average.
Read more: Still chasing a 2% mortgage rate? That's why it's time to let them go
Should I buy a home in 2025?
Buying a home is a personal decision, so it should fit your situation and budget. When you buy a home, consider a variety of strategies to lower your price and focus on the control factors. A mortgage calculator can help you estimate how much you pay per month.
“If you’re happy with your monthly payment, you shouldn’t be fixed at a specific rate,” Deflorio said. “Especially because if the price continues to rise, you may be paying a higher purchase price because of waiting.”
Additionally, the market is particularly uncertain as the United States has a new presidential administration. Trying to time the market can backfire.
“It's too easy to get it wrong,” Robertson said. “The decision to buy a home should go far beyond the mortgage rate.”
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