How to Lower Mortgage Interest Rate

mortgage interest rate

Buying a home is a primary way for Americans to build wealth. With mortgage interest rates nearing their all-time record low, the market is hotter than ever. But if you don’t know how to lower mortgage interest rates, you might miss this golden opportunity.

That’s where MoneyLion comes into play! Whether you’re a first-time homebuyer or you’re looking to refinance your loan, we’ve got your back. 

What is a mortgage interest rate?

The term mortgage is just a fancy way of referring to a loan that you take out for the purpose of buying a house. And like most loans, your mortgage comes with its own interest rate. 

Typically, you’ll see your mortgage rate listed as an APR, or annual percentage rate. This accounts for interest, fees, and points calculated into your loan agreement. 

Understanding interest rates is crucial because your interest rate will drastically affect your loan. For instance, let’s say you secure a thirty-year mortgage for $200,000 at a 3.25% interest rate. 

Over the course of thirty years, you’ll end up paying $113,349 in interest on top of your loan. But the same loan at a 4% interest rate would result in a total of $143,739 in interest alone, which is $30,000 more!

How does a mortgage interest rate work?

Mortgages come with either a fixed rate or an adjustable interest rate. Fixed-rate mortgages maintain the same interest rate for the life of the loan. But adjustable-rate mortgages, or ARMs, fluctuate alongside the housing market. 

Regardless of which interest rate you secure, most mortgages are structured so that the bulk of your payments covers your interest rate, at least in the beginning. But as time goes on, more and more money will be put towards your principal. 

Additionally, you should know that mortgages come with compound interest as well. Every month, any unpaid interest that you accrue will be added to the principal value of your mortgage. 

From there, your lender will charge interest on your newly-increased principal. This will further increase the total cost of your loan over time. As such, it’s no wonder that the opportunity for a mortgage interest rate reduction is so enticing. 

5 ways to lower your mortgage interest rate

Knowing how to lower mortgage interest rates can make your mortgage more affordable. But you should also know when to lower your rates.  

1. Build your credit score

Building your credit score before you buy a house may ultimately lower your interest rate. Credit scores that are viewed as less risky, meaning they are around 760 or higher, usually yield the best rates. 

If you need to build your credit score now, MoneyLion can help. With a MoneyLion Credit Builder membership, you can raise your score by 60 points within 60 days for only $19.99 per month!

2. Purchase discount points

Purchasing discount points can help homebuyers lower their interest rates during negotiations. For every point you buy, you’ll knock a small percentage off your annual interest rate. In exchange, you’ll pay between one and two percent of the mortgage in the form of upfront closing costs. However, the availability and mortgage interest rate reduction power of points varies by lender. 

3. Refinance interest rates

Refinancing your mortgage is the primary way to lower your interest rate after closing. In other words, you’ll buy out your old mortgage in favor of a new one with better terms. 

However, refinancing carries the same closing costs as initially agreeing to your first mortgage, such as appraisal, origination, and title insurance fees. As such, refinancing may not be worth it if your interest rate drops by less than one percent. 

4. Refinance term length

Refinancing your term length may also make your interest rate drop. For instance, fifteen-year mortgages usually carry lower rates than thirty-year mortgages. As such, refinancing your term can save you thousands in interest, though your monthly payments will rise drastically. 

5. Loan modification

If you’re wondering, “Can I lower my mortgage interest payment without refinancing?” the answer is yes! However, it’s not ideal. This option is known as a loan modification or a mortgage modification.

During a mortgage modification, a lender may restructure your loan by enacting the following changes:

  • Lowering your interest rate
  • Extending your term
  • Reducing the principal balance
  • Switching from an ARM to a fixed-rate mortgage

But loan modifications are typically only available to borrowers who are struggling financially. Additionally, modifications can negatively impact your credit score. 

3 ways to lower your mortgage payment

Once you’re locked into a mortgage, it’s unusual to see your interest rate drop without refinancing. Lowering your monthly payments is another story in and of itself. 

Cancel your mortgage insurance

If your down payment is less than twenty percent of the sale price of your home, your lender might require you to pay private mortgage insurance (PMI). But once you reach an equity of twenty percent, you can request to drop your PMI for good. 

Mortgage forbearance

Mortgage forbearance lets you temporarily pause or lower your payments. This allows struggling homeowners to keep their accounts in good standing while they get back on their feet. However, you’ll still be responsible for any and all of your missed payments. 

Make biweekly payments

If you want to lower the total cost of your mortgage, you can try paying half of your payment biweekly. The math is simple.

Every year has 12 months. But if you pay biweekly for 52 weeks, you’ll make 26 half payments, or 13 full payments, within the same period. With a thirty-year mortgage, that can cut up to four years off of your term! 

We can’t lower your rate, but we can help you build a safety net!

Learning how to lower mortgage interest rates can save you thousands of dollars. But instead of blowing your savings on a new pool, why not build a financial safety net with MoneyLion? Whether you want a backup for good times, bad times, or “It’s home improvement!” times, we’ve got your back with our RoarMoneySM banking account, 0% APR InstacashSM loans, and other financial assistance tools!

How are mortgage rates set?

Inflation, economic health, and job growth all factor into baseline mortgage rates. Your credit score, lender, down payment, and loan amount may also affect your rate.

How do I compare current mortgage rates?

Many personal finance, banking, and lending websites offer comparison tools for prospective homebuyers. You can also call different lenders to get personalized quotes.

Is mortgage interest deductible?

After the 2017 Tax Cuts and Jobs Act, homeowners can write off itemized interest payments on the first $750,000 of their mortgage.

Can I lower my mortgage interest rate without refinancing?

You can, but you may have to prove financial hardship to qualify.

Will refinancing lower my payments?

Refinancing can lower your interest rate, payments, or both.

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