Lower Your Mortgage Rate By 1.5%? Here's What You Need To Know

In today’s environment, would-be homebuyers and current homeowners may seek ways to secure a lower and more favorable mortgage rate.

A report by Realtor.com’s economic research team found that borrowers could potentially reduce their mortgage rates by up to 1.5% through a combination of strategic moves.

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That reduction can be significant. A $500,000 home purchase with a 20% down payment translates to savings of $400 per month or $4,800 annually. With 30-year fixed mortgage rates hovering just below 6.5%, according to Freddie Mac, the potential savings aren't small.

Ralph McLaughlin, senior economist at Realtor.com, said that while macroeconomic factors like the 10-year Treasury yield and Federal Reserve policy influence mortgage rates, individual borrowers have more control than they might think. “There are things that borrowers can do themselves to lower their mortgage rate,” McLaughlin said.

The study investigated over two million mortgage originations between 2022 and 2023 and identified four strategies borrowers can use to reduce their rates.

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Explore Lender Options for Competitive Rates

Realtor.com noted that perhaps the most straightforward approach is to get quotes from multiple lenders. The study found an average difference of 0.86% between the highest and lowest rates offered to buyers who shopped for multiple offers.

Despite the potential for savings, a study by LendingTree in May found that 54% of homebuyers accepted the first offer they received without shopping around. LendingTree noted that Millennials were more likely to compare rates, with 62%, compared to just 28% of baby boomers.

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Boost Your Credit Score

Credit scores play an important role in determining mortgage rates. The study found that borrowers with “Very Good” or “Excellent” credit scores (above 750) received mortgage rates that were, on average, 0.39% lower than those with “Bad” credit scores (below 650).

While improving one’s credit score can be challenging, there are practical steps borrowers can take. Consistently making on-time payments and keeping credit utilization below 30% can lead to relatively quick improvements in credit scores.

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Increase Your Down Payment

According to Realtor.com, the average down payment in the first quarter of 2024 was 13.6% of the total home purchase price, with a median amount of $26,000. However, the study found that mortgage applicants with a loan-to-value ratio of less than 80% (equivalent to a 20% down payment) received rates of 0.18% lower than those with a loan-to-value ratio of over 95%.

Beyond the direct impact on rates, Realtor.com said that getting an 80% loan-to-value ratio often eliminates the need for private mortgage insurance, further reducing monthly payments.

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Manage Your Debt-to-Income Ratio

While the impact is less pronounced, maintaining a debt-to-income ratio below 30% can yield benefits. The study found that applicants with debt-to-income ratios under 30% received rates that were 0.045% lower than those with ratios over 43%.

As the Fed points to cutting its benchmark rate as soon as September, mortgage rates are expected to decline. In this context, the individual strategies Realtor.com noted offer borrowers concrete steps to secure more favorable rates soon.

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