How do I get a lower mortgage rate?
Mostly you buy it down. A discount point is money paid at closing to lower your rate, typically one percent of the loan amount per point, and whether it pays off is a single calculation: divide what the points cost by the monthly saving to get your break-even in months, then compare that against how long you realistically expect to keep the loan. Credit score, lock period and loan term move your rate too, but points are the lever you control on the day.
What actually moves your rate
Advertised rates are not one number that everybody gets. The figure you are offered is built from a handful of inputs, and only some of them are still open to you by the time you are shopping.
- Discount points — the direct lever, and the one covered below.
- Credit score — priced in bands, so a few points either side of a boundary can change the rate more than the rest of your file.
- Loan term — a 15-year note prices below a 30-year one, at a higher payment.
- Lock period — a longer lock costs a little more, because the lender is carrying the risk for longer.
- Down payment — crossing an equity threshold can move both the rate and the mortgage insurance.
Be careful comparing one rate against another
A lender can advertise a low rate and recover the difference in fees, so two quotes with the same rate are not necessarily the same deal. APR exists to make that comparison honest, which is why Regulation Z requires it wherever a rate is advertised.
The useful comparison is the whole ladder — each rate with the points and fees attached to it — rather than one row somebody else chose to show you.
The break-even calculation
Take what the points cost you at closing. Divide by the amount your monthly payment falls. The result is the number of months before the points have paid for themselves.
Stay past that point and the points were worth buying. Sell or refinance before it, and you paid for a benefit you never collected. That is the whole analysis — everything else is detail.
What makes it more or less likely to pay off
Break-even periods on points frequently land somewhere in the region of several years, which puts a lot of weight on your plans:
- Buying a long-term home tilts strongly towards paying points.
- A starter home you expect to outgrow in a few years tilts against.
- If rates are unusually high, refinancing later becomes more likely, which shortens your real holding period and argues against points.
- If cash at closing is tight, that money often does more good as reserves than as a rate buy-down.
The other direction: lender credits
The trade runs both ways. Accepting a slightly higher rate can produce a lender credit that reduces your cash to close. For a buyer who is stretched on closing funds but comfortable on monthly payment, that can be the better trade — and it is the same calculation in reverse.
This is why a single quoted rate tells you so little. The rate and the closing cost move together, and the useful view is the whole ladder rather than one row somebody else picked for you.
Sources
We would rather you checked than took our word for it.
Related
Interest rate vs APR: what is the difference?
The interest rate determines your monthly principal-and-interest payment.
What credit score do I need to buy a house?
FHA loans allow a credit score as low as 580 with a 3.5% down payment, and conventional loans generally start in the low-to-mid 600s.
How much house can I afford?
Lenders decide what you can borrow using your debt-to-income ratio: your total monthly debt payments, including the new mortgage, divided by your gross monthly income.