Mortgage rates have been on a tumultuous path, rising from pandemic-era record lows to two-decade highs in just a few short years. High rates are exacerbating an already challenging market thanks to rising home prices and stubbornly high inflation.
In fact, the combination of high rates and high home prices recently put the median monthly payment on a new mortgage at $2,170, according to the Mortgage Bankers Association—up 18% from one year prior. Compared with 2021, average payments have increased 69%.
“Current market conditions have caused some buyers to pause and rethink their homeownership plans,” says Janet Poe, a vice president at Chase Home Lending in Houston.
Pausing your home search isn’t the only option, though. Since mortgage rates vary by lender—not to mention by borrower—there are several ways you can reduce your rate and, subsequently, your monthly payment. Here’s what experts say to do to get the best possible mortgage rate.
1. Check in on your budget
One of the biggest downsides to higher mortgage rates is that they squeeze your budget—allowing you to borrow less for the same monthly payment you could have a few months ago.
Think of it this way: Say you can afford a $31,500 down payment, the current national median, and $2,000 a month for your mortgage payment. In February, when the average rate was 6.09%, that would mean you would have a home budget of about $361,500. Today, with rates at 7.79%, your budget drops to $309,500, over $50,000 less.
To see where your budget stands at today’s rates, use an online mortgage calculator and adjust for current mortgage rates. Just remember: That monthly payment won’t be your only expense. You’ll also owe a down payment and closing costs (typically 2% to 6% of the total loan amount), and there will be ongoing home maintenance, taxes, homeowner association, or HOA, dues and insurance to factor in, too.
2. Improve your credit score
Interest rates vary based on your credit score. That’s because your score is supposed to be a reflection of how risky you will be as a borrower. A higher score indicates “you’ve paid your credit card bills on time and are responsible with your money,” as Poe puts it, while a lower score suggests you’re more likely to skip your payments or default on your loan.
As a result, lenders charge borrowers with lower credit higher rates on mortgages. Higher scores—usually 760 and above—get the lowest rates.
“If you’re trying to get into a home with the lowest out-of-pocket price possible, then you really need a mid-to-upper 700s score or better,” says Mason Whitehead, branch manager of Churchill Mortgage in Dallas.
Reducing your debt, paying your bills on time and reporting errors on your credit report can help improve your credit score. If you rent your home, you can also report your monthly rent payments to credit bureaus, and that should help your score, too.
3. Compare several mortgage lenders
Just as rates vary by credit score, they can vary widely between mortgage lenders, largely because each one has different overhead costs, capacities and appetites for risk. For this reason, it’s important to shop around for your loan, getting rate quotes from at least two to four different companies.
According to Freddie Mac, borrowers who get two rate quotes reduce their rate by an average 0.20 percentage points—for example from 7.5% to 7.3%—saving about $600 annually. If you get four quotes, that reduction jumps to 0.40 points or $1,200 in annual savings.
If you’re worried about applying with several lenders—and the hard credit inquiries that will come with those applications—just make sure you submit your preapproval applications within the same month. If you do, This allows credit bureaus to treat them as one hard credit pull, rather than several.
According to Poe, some buyers are hesitant to shop around, “because they fear it will impact their credit score.” However, she says, “Five different lenders could pull your credit within a week or two and the impact would be the same as one lender pulling it.”
Once you apply with each lender, you should receive a loan estimate form. You can use this to compare the companies’ rates, loan fees and closing costs. In this rate environment, you also might want to consider any future refinancing offers. Because mortgage rates are so high, some lenders have started offering fee-free refinancing if rates drop within the next few years. This might be something to look for if your initial rate is higher than you would like.
4. Consider alternative mortgage options
About 90% of homeowners choose the 30-year fixed-rate mortgage, but that doesn’t mean you have to. In fact, if you want the lowest interest rate possible, other loan options might be better.
With an adjustable-rate mortgage, or ARM, the initial interest rate is fixed for a period—usually the first three, five, seven or 10 years. After that, the rate resets every six months or year, based on prevailing market rates.
Because you’re taking on future interest-rate risk as an ARM borrower, you’ll receive better rates during the initial, fixed period of the loan than you would with a 30-year mortgage. Recently, the average rate on 30-year fixed-rate mortgages was 7.62%, while rates on 5/1 ARMs sat at 6.61%—over a full percentage point lower.
Still, ARMs aren’t right for everyone, and depending on where rates go, you could end up paying more in the long run. If you’re not willing to take that risk, opting for a 15-year fixed-rate mortgage is another option. These also tend to have lower rates than 30-year loans (they averaged 6.91% for the same period mentioned above).
This will save you money over time, but take note: Fifteen-year mortgages come with significantly higher monthly payments, as you’re spreading the loan balance across fewer years. Still, Whitehead says, “The 15-year is a great choice if you have no other debt and can afford the payments. You’ll save an incredible amount of money on interest.”
5. Buy mortgage points
Buying mortgage points—sometimes called a “mortgage rate buy-down”—is another way to snag yourself a lower interest rate. With this approach, you pay around 1% of your loan amount and get a small reduction in your interest rate in return—typically 0.25 percentage points or less. It’s essentially a way of prepaying those future interest costs.
Be careful, though: Mortgage points are only worth it if you plan to stay in your home long enough to recoup their cost—something mortgage pros call “reaching the break-even point.” For instance, if buying points costs you $5,000 and saves you $50 a month, you’d need to stay in the home 100 months (over eight years) to make those upfront costs worth it.
In other words, if you can spare the cash, points can be a great way to save money in the long run. Just make sure you are willing to stick it out. “If you end up selling your home before you anticipate, the buy-down is less attractive,” says Shaun Pappas, a partner with Starr Associates, a real estate law firm in New York. “The cost upfront could be more than the overall savings.”
However, that’s only true if the cost of the points falls on you. In some situations, other parties may pay for your points, including your lender, your real-estate agent or even the seller of the home you’re buying if they’re particularly motivated to sell. Home builders have also been offering buydowns lately to motivate buyers to purchase new construction. In October 2023, nearly 30% of builders were actively offering rate buydowns, according to the National Association of Home Builders.
6. Lock your rate
Once you pick which lender and home you’re going to go with, you should be able to “lock” your interest rate in place. This guarantees you the rate you were quoted for a certain amount of time—usually 30 to 90 days—to protect you from any increases in market rates. Some lenders may offer longer rate-lock periods, though they typically come with a fee.
Once you lock your rate, keep in mind: Time is of the essence. If you don’t close before your rate lock expires, you’ll get a new interest rate based on current market conditions—and it could be much higher than the one you were originally offered.
If rates go down while you’re in your lock period, though, you may be able to “float down” your rate. Not all lenders offer this, and of those that do, most will charge a fee.
7. Take your time
Even after all this, it’s possible you still may be offered a rate—and, subsequently, monthly payment—that’s outside your budget. If that’s the case, look at lower-priced homes or shop in more affordable areas.
You might also consider stepping back from the home search altogether. As Jerimiah Taylor, vice president of real estate and mortgage services at real-estate company OJO Labs, explains, “In these situations, it’s better to pause your search than to get into a precarious financial situation.”
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More on mortgages
- Current Mortgage Rates
- How to Get a Mortgage
- What Is the Mortgage Interest Deduction?
Meet the contributor
Aly J. Yale
Aly J. Yale is a contributor to Buy Side from WSJ and a personal finance journalist with work featured in Forbes, Fox Business, The Motley Fool, Bankrate, The Balance, and more.
