Getting an interest rate even one point lower can save you thousands – or potentially tens of thousands – annually, depending on the purchase price, interest rate, and total amount being financed.
For example, if you’re financing a $425,000 home with a 30-year fixed-rate loan and plan to put 20% ($85,000) down. With an interest rate of 7%, your estimated monthly mortgage payment (excluding property taxes and homeowners insurance) would be $2,608, and you’ll pay $474,355 in interest over the life of the loan.
Using those same parameters but with a 6% rate, your monthly mortgage payment would drop to $2,384, and your interest over the life of the loan $206,017.
If you like saving money — and who doesn’t? — here are four ideas that could help you score a lower rate.
1. Improve Your Credit Score
Experts recommend you have a credit score of 620 or higher when you apply for a mortgage. If your score is below 620, lenders either won't be able to approve your loan or may offer you a higher interest rate, which results in higher monthly payments.
Credit scores are calculated using information in your credit report, maintained by the credit bureaus (TransUnion, Equifax, and Experian). You’ll want to make sure there are no red flags on the report. By law, you can request a free copy of your credit report annually. Visit AnnualCreditReport.com or call 877-322-8228. If you find an error, you can file a dispute by going to the credit bureau’s website. If you send original documentation as part of your dispute, be sure to keep copies.
If your credit score is on the low end, an AAFMAA Mortgage Services LLC (AMS) Military Mortgage Advisor can help you develop short- and long-term credit-building goals to improve your situation and get you mortgage-ready.
Related: What Every Military Homebuyer Should Know About Credit
2. Put More Down
Lenders will offer better rates to borrowers with a substantial — 20% or more — down payment.
If you’re below that, there are ways (other than asking your folks) to feather your nest a bit more. First, Down Payment Resources (downpaymentresources.com) has a database of more than 2,000 programs to help with down payment and closing costs. Some are restricted to first-time buyers, normally defined as someone who has not owned a home in the past three years, although this requirement is often waived for servicemembers and Veterans.
Another way to boost your down payment is by taking out a second mortgage at the same time as your primary (purchase) mortgage. Taking out a second is a strategy often used by borrowers with conventional financing who want a downpayment of 20% or more to avoid paying for private mortgage insurance.
Related: What is a Second Mortgage and Do I Need One?
3. Buy Discount Points
Another popular way to lower your interest rate is to pay points (called discount points) directly to the lender at the closing table. Points are calculated as a percentage of the total amount of your loan. One point equals one percent of the loan amount. Generally speaking, paying one percent of the loan amount in points will lower your rate by 0.25 percent. So you’re paying one percent upfront to pay a quarter of a percent less per year in interest.
For example, assume you’re applying for a mortgage of $100,000. One percent — or one point — of the loan value is $1,000. So you would need to benefit by $1,000 in reduced interest payments to breakeven on buying that one discount point. Use our free calculator to see if paying points makes sense for you.
Knowing how long you intend to keep the loan — without selling or refinancing it — can help you weigh the value of paying discount points. If you’re planning to relocate in less than three years, you probably won’t recoup the cost of paying points. If you’ll be in your home for 10 years or more, paying points can make sense.
4. Ask for a Temporary Buydown
A temporary buydown involves having a seller pay a fee upfront to reduce the interest rate on a mortgage for a certain period of time — generally a few years. Buydowns like these can only be paid by a seller or builder, not by the lender or borrower.
While terms will vary among lenders and there are restrictions on buydowns in some states, most buydowns will be limited to loans for new and existing homes, and the loan and borrower must qualify at the higher (fixed) rate to be eligible for a buydown.
There are many reasons a buydown could be advantageous for a military buyer in today’s market. First, interest rates are expected to hold steady or rise slightly, so having a lower rate for the first years of your loan will save you money. Also, you could be anticipating a Permanent Change of Station (PCS) move in the coming one to three years, in which case you may want to sell, or refinance, the loan anyway. If you sell or refinance the loan, any unused buydown funds are credited against the loan payoff.
We’re Here to Help
Whether you're thinking about buying, ready to start home-shopping in earnest, or considering a refinance, an AMS Military Mortgage Advisor will be happy to provide you with an honest and fair comparison of your mortgage options, including a wide range of affordable mortgages designed to meet your needs.
Ensuring AAFMAA Members obtain the best mortgage possible is our mission. Get your free mortgage assessment today or give us a call at 844-422-3622!
This article was originally published June 12, 2019.