While COVID-19 has created uncertainty in many areas of the economy, homeowners and those interested in purchasing a home may be able to take advantage of some of the economic side effects of the pandemic to save money.
In March, the Federal Reserve took steps to help bolster consumer spending. The emergency interest rate cut was a move to help protect the economy and marked the most substantial reduction since the financial crises of 2008.
Interest rates on home loans and home refinances are now at a historical low for most areas of the country. In late June, interest rates on 30-year loans were averaging at 3.13 percent, and 15-year mortgages were averaging 2.58 percent.
While most interest rates are hovering in the lower 3 percent range, it may be possible to score a loan even lower. If you want to save big money on your home purchase or your current mortgage, here are a few tips you should consider:
1. Refinance your loan from a 30-year loan to a 15-year loan
The simplest way to cut your interest rate and save money over the life of your loan is to refinance your 30-year mortgage loan to a 15-year mortgage loan. Lenders will offer the best prices, and you’ll pay your home off much faster.
If you're considering a mortgage refinance, make sure you use Credible's free online tools for your research. The online marketplace can help you find personalized rates within minutes and compare offerings.
A 15-year mortgage loan allows you to build equity in your property more quickly than a 30-year loan.
Your monthly payment could go up since you’re condensing your debt into a shorter term, but if your current interest rate is much higher that the current rate, you might be able to lower your monthly payment.
If you’re in the hunt for a new home, consider opting for a 15-year mortgage instead of 30-year financing.
2. Shop around for interest rates
Like anything, if you want to get the best price, you’ll need to look at multiple lenders to find the best interest rates for your situation. Credible can show you interest rates on a refinance from various lenders. You can also use a comparison tool to find out whether you qualify for a pre-approval letter without impacting your credit score.
As you’re reviewing lenders, remember that your loan will likely include additional fees (closing costs, loan origination fees, etc.), so the APR will probably be higher than your quoted interest rate.
Whether you’re seeking a new home loan or you’re interested in refinancing, be patient. There is a lot of interest from other consumers right now, so it may take a bit longer than usual to hear back from a lender. While you’re waiting, take some time to get your finances in order so you’re ready to move forward when the lender calls.
3. Pay for mortgage points
You may be able to lower your interest rate by paying for mortgage points. Mortgage points are like pre-paid interest. Each point you purchase equals one percent of the principal loan. For example, purchasing one point on a $300,000 loan would equal $3,000.
Purchasing mortgage points only makes sense if you plan to be in the home for a long time and if you're able to afford the upfront cost.
4. Take steps to improve credit score
Qualifying for a refinance or a new home loan is a little more complicated than before COVID-19. Because interest rates are so low, lenders want to protect their investments, so they’re more particular about the funds they lend. If your goal is to qualify for the best interest rates, you’ll need to make sure your credit score is in tip-top shape. You should aim for a credit score of at least 760 to land the lowest interest rates.
If you’re not quite there, take some steps to raise your score. Things you can do to help increase your credit score include:
- Reducing your total debt
- Make payments on time
- Avoid applying for multiple lines of credit for the next few months
- Check your credit report for errors
- Earn more money
5. Provide a sizable down payment
Another simple way to reduce your interest rate is to offer a larger down payment. Lenders are more likely to give you a lower interest rate if you prove that you have a vested interest in your purchase.
When you provide a sizeable down payment, lenders will see you as committed to your investment. If you can pay more than 20 percent, you won’t have to pay for private mortgage insurance, you’ll have a smaller monthly payment, and you’re more likely to score your dream home if you end up in a bidding war.