How Much Can You Save?
So far, you’ve learned several key facts about mortgage rates:
- Your mortgage rate affects your monthly payment, with a higher rate meaning a higher monthly payment.
- Your rate also affects how much you pay over the life of your loan, with higher rates equaling greater total costs.
- A higher interest rate can mean a higher monthly payment, even on a cheaper house.
- Your monthly payment doesn’t just include loan principal and interest — there’s insurance and taxes, plus other costs of owning a home to consider.
Knowing all that, your first thought should be:
- How can I get this freaking rate down?!
There are two ways you can go:
Earn favorable pricing adjustments by being a less risky borrower.
Pay for discount points upfront to lower your rate.
Both loan officers and lenders prefer less risky borrowers. If that’s you, you will earn a pricing adjustment on the lender’s standard going rate, called the par rate, saving you money. However, pricing adjustments work both ways, meaning you’ll have a slightly higher rate to offset the lender’s risk in certain situations. Here’s what matters when it comes to pricing adjustments.
Loan Amount – Taking out a conforming loan (the limit is established by Fannie Mae and Freddie Mac) can save you money. Expect a somewhat higher interest rate for a jumbo loan above that pricing limit. Loans over $1 million carry yet more risk for lenders, so expect a notable pricing adjustment here if you’re buying a high-priced home.
Loan-to-Value – The ratio of your loan to the home’s value is also a pricing adjustment factor. The more money you put down on the home, the more you shift burden away from the lender, which can help your rate. Ask your lender if a slightly higher down payment could affect your rate.
Credit Score – One of the biggest places your rate can be helped or hurt by a pricing adjustment is your credit score. With a FICO score of 740 or more, you generally qualify for a pricing rebate. The range from 680–739 is generally considered normal and doesn’t typically help or hurt your final rate. Below 680, your lender will start adding up pricing adjustments that will raise your rate the lower you go. So whatever you do, work on raising that credit score above 680, if not 740 or higher.
Occupancy – Are you planning on living in this new home full time? Congrats! You’ve just saved yourself a good bit of money on your rate. Buying property as a second home, vacation home, or investment property can add a notable increase to your rate.
Property Type – If you’re buying a single-family home, you won’t see a rate increase for choosing this type of property. However, condos and multi-family buildings tend to earn pricing hits that up your rate.
Loan Purpose – Making a new home purchase will usually get you a pricing rebate or adjustment, refinancing for a better term or rate usually has no cost, and cash-out refis earn a pricing hit.
Documentation – Full documentation of your income and assets significantly helps lower your rate. The only reason to forego full documentation is if you’re self-employed, or have complicated income documentation or tax returns. If you go for less than full documentation, expect to pay a higher rate for your loan.
Mortgage Discount Points
The nice thing about pricing adjustments is that you can influence your rate without handing extra money to your lender — though you may need to make a bigger down payment or pay down credit card balances. With mortgage discount points, you are buying yourself a lower rate by paying more upfront.
A discount point is an additional percentage of your loan amount you agree to pay at closing to lower your interest rate. Each lender’s discount point ratio for interest rate savings varies, but it’s generally a fraction of a percent off your rate. Whether the added upfront cost is worth it, or feasible financially, has to be decided individually. If you plan to move or refinance in a few years, it might be wiser to take a higher interest rate and skip the points.