7 ways to reduce your mortgage interest rate by 1% or more

If you’re looking to buy a home, you probably know that housing affordability is in jeopardy. Record high prices and high mortgage rates are a double whammy for potential buyers around the world.

A recent CNET survey found that half of American adults would realistically consider buying a home or refinancing an existing mortgage if interest rates fell to 4% or lower. Yet most mortgage forecasts do not even assume an average interest rate will fall below 6% in 2025.

But the average mortgage rate is, well, average. Depending on your financial situation, the rate you qualify for may be significantly lower than what lenders advertise. A 1% difference in your mortgage rate can save you hundreds of dollars per month and tens of thousands of dollars over the life of your loan.

You have no control over the market forces that influence mortgage rates. However, by optimizing your credit score and negotiating with multiple lenders, you can get a lower-than-average rate on your future home loan.

What is considered a ‘good’ mortgage rate?

Historically, good mortgage rates have generally been at or below the national average. According to Freddie Mac, thirty-year mortgage rates have averaged 7.72% since 1971. Over the past year, the average mortgage interest rate mainly fluctuated between 6% and 7%.

With that in mind, we think getting an interest rate in the mid to low 6% range is pretty good Sarah DeFloriovice president of mortgage banking at William Raveis Mortgage.

But affordability depends on your overall financial situation. And because mortgage rates can change daily and even hourly, the definition of a “good” rate can change quickly.

“What matters is the rate you can get today,” says Colin Robertson, founder of The truth about mortgage. According to Robertson, the only way to know if you’re getting a good deal is to talk to a few different lenders and brokers and then compare their quotes to daily or weekly averages.

Read more: Still looking for a 2% mortgage rate? This is why it’s time to let them go

How does a 1% difference affect your monthly mortgage payment?

Lowering your mortgage rate by even 1 percentage point can make a significant difference in your budget, translating into a savings of about 10% on the monthly mortgage payment.

For example, say you buy a house for $400,000 and make a 20% down payment on a 30-year fixed-rate mortgage. The difference between a 7% rate and a 6% rate means a savings of $210 per month, which equates to a savings of $75,748 over the life of the loan.

Here’s a quick look at how the monthly mortgage payments compare for the same house at a rate of 7%, 6%, and 5%:

Save money on your mortgage with these 7 tips

Improving your credit score, increasing your down payment, purchasing points and negotiating your rate can help you save money on your mortgage. If you take some (or all) of these steps, you can reduce your rate by 1% or even more.

1. Buy mortgage points

A mortgage point, also called a mortgage discount point, is an advance payment that you can pay to the lender in exchange for a lower interest rate on your home loan. Nearly half (45%) of home buyers used this strategy when taking out a mortgage in 2022. Zillow Research.

Each point costs 1% of a home’s purchase price and typically reduces the rate by 0.25%. On a $400,000 home, you pay $4,000 for one discount point. The lender may even allow you to purchase four mortgage points to lower the interest rate from 7% to 6%, although that will require you to spend $16,000.

To check if this strategy is worth it, take the total cost of the points and compare it to the total monthly savings. In this case, if you pay $16,000 to buy four points and save $210 per month, it will take you more than six years to reach your breakeven point.

2. Improve your credit score

Lenders look at your credit score to decide whether you qualify for a home loan and what interest rate you will receive. FICO credit scores range from 300 to 850, with 850 being the best possible score. Higher credit scores show that you have handled debt responsibly in the past, lowering your risk to a lender. This allows you to secure a lower interest rate.

“The best mortgage rates and products are typically reserved for those with a credit score of 740 or better,” DeFlorio said.

If your credit needs improvement, consider taking steps to increase your credit score before applying for a mortgage. It can help you save a lot, according to a 2024 Credit tree study. When borrowers moved from the “fair” credit score (580 to 669) to the “very good” range (740 to 799), they shaved 0.22 percentage points off their interest rate. That interest rate difference allowed borrowers to save $16,677 over the life of a home loan.

Still, Robertson said that “it is possible to get a good rate with a lower score, and simply shopping around can make up the difference.”

3. Increase your down payment

Your down payment is the amount you can contribute upfront to the purchase of your home. Each type of home loan comes with a minimum down payment, usually ranging from 0% to 5%, but a higher down payment can help lower your rate. That’s because the lender has less risk if you contribute more to the loan.

Because a down payment lowers your interest rate and increases your home equity, some home loan experts recommend making a larger down payment, around 20%, rather than purchasing mortgage points. That’s because if you sell or refinance the house before you reach your breakeven point, you’ll lose money. But the amount you spend on your down payment becomes part of your equity.

4. Take out a variable rate mortgage

An adjustable-rate mortgage, or ARM, is a home loan with a fixed interest rate for a fixed introductory period, such as five years. Once that period ends, the interest rate can increase or decrease at regular intervals for the remaining term.

The big appeal of ARMs is that the introductory interest rate is often lower than that on traditional mortgages. In November, the average 5/1 ARM rate was 6.19%, compared to 6.79% for 30-year mortgages.

5. Negotiate your mortgage rate

When you apply for mortgage loans, you don’t have to deal with the company that granted you pre-approval. In fact, research shows that obtaining interest rate quotes from multiple lenders and comparing offers can yield significant savings.

If you want to use this strategy, start by submitting a mortgage application to lenders that meet your criteria. Once you have some loan estimates in hand, you can use the best ones to negotiate with the lender you want to work with.

The loan officer can lower your rate, help you save on closing costs, or offer other incentives to get you on board. In one 2023 LendingTree survey39% of home buyers negotiated the interest rate on their most recent home purchase. Of that group of buyers, 80% were able to get a better deal.

6. Choose a shorter term for your home loan

Nearly 90% of home buyers choose a 30-year mortgage term because it offers the most flexibility and affordable monthly payments. The payments are lower because they are spread over a longer period of time, but you can always put more towards the principal here and there.

But if you take out a longer-term home loan, “you’re holding back the lender’s money, and there’s an opportunity cost for the money that has to be invested elsewhere,” he said. Nicole RuethSVP of the Rueth Team, powered by Movement Mortgage.

Shorter loan terms, such as 10- and 15-year mortgages and ARMs, have lower interest rates, so you can lower your interest rate now.

If you choose a shorter repayment term, you can save money because you pay less interest in the long term. But don’t make the mistake when buying a home by choosing a shorter loan term just because of the lower rate. Shorter loan terms mean you have less time to pay back the money you borrow, resulting in higher monthly payments. So it’s important to make sure these fit your budget.

7. Arrange a temporary buyout of the mortgage interest

With a temporary mortgage interest buydown, you will have to pay a fee at closing to lower your interest rate for the first few years of your term. Because of the significant upfront costs, this strategy only makes financial sense if someone else pays for that fee. Homebuilders, sellers and even some lenders may offer to cover these types of buyouts to stimulate sales, especially when market interest rates are high.

For example, a lender might offer a “3-2-1” buydown, which reduces the interest rate by 3 percentage points in the first year, 2 percentage points in the second year, and 1 percentage point in the third year. From the fourth year onwards, you pay the full rate for the remainder of the term.

Buyers often opt for a temporary buyout and plan to refinance later. Your buydown funds are refundable, and you can use them for closing costs when you refinance (if interest rates drop).

Should you wait for cheaper mortgages?

Buying a home is a personal decision, so it should feel right for your situation and budget. As you search for a home, consider several strategies to lower your rate and focus on factors within your control. A mortgage calculator can help you estimate what you would pay each month.

“If you’re comfortable with the monthly payments, you don’t need to fixate on a specific rate,” DeFlorio said. “Especially because if prices continue to rise, you may pay a higher purchase price because you waited.”

Moreover, the market is currently particularly uncertain as the US prepares for a new presidential administration. Trying to time the market can backfire.

“It’s too easy to do it wrong,” Robertson said. “The decision to buy a home should go far beyond just a mortgage rate.”

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