Lower Your Mortgage Interest Rate

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1 Overview

Many homeowners refinance their mortgage to lower their rates when all they really wanted to do is lower their mortgage payment. The interest rate on your loan is just one of several factors that affect your payment. Find out what determines the interest rate on your loan so you can make a smart decision about lowering your interest rate.

Key Factors Influencing Interest Rates:

  • Annual Percentage Rate (APR)
  • Points
  • Type of Mortgage
  • Borrower's Credit

Today's Rates

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2 How Interest Rates Are Determined

Home loan lenders charge interest to customers that borrow money from them. The interest rates that home loan lenders can charge are determined, in part, by the monetary policy of the Federal Reserve Board (or Fed) - a government-sponsored committee that monitors the nation's economy and sets various interest rates to help control and manage it. When it comes to your mortgage payment, there are several factors that have a great impact on your payment.

1. Annual Percentage Rate (APR)

Home loans are more than interest rates and points. They also involve other costs. The APR expresses the annual cost of a loan as a percentage, factoring in not only its rate, but the points and other charges over the life of the loan.

The Truth-in-Lending law requires all advertisements for home loan credit terms to include the APR. The APR is intended to enable you to compare terms of loan products from different lenders. To make an accurate comparison, compare loans with the same terms, interest rates and points. Then look at the APR. The loan with the lower APR is the less expensive loan.

2. Points

With many loans, you can lower the interest rate you receive by paying higher points. Points are fees paid to the lender at closing. Each "point" is equal to 1% of the loan amount.

Points and Fees

  • Points / Loan Amount: $100,000 / Loan Amount: $200,000
  • 1 / $1,000 Fee / $2,000 Fee
  • 2 / $2,000 Fee / $4,000 Fee

When should I consider paying points?

If you plan on staying in the home long enough to cover the cost of paying the point(s) and you have cash available, you may want to consider paying points. It's good way to save money on interest over the life of your loan.

See our Discount Points Breakeven Calculator

3. Type of Mortgage - Fixed or Adjustable

Fixed-Rate Mortgages and Interest Rates

  • Fixed interest rate over the life of the loan
  • Monthly payment will not increase or decrease over the loan term

Adjustable Rate Mortgages (ARMs) and Interest Rates

  • Variable interest rate, typically adjusts every 6 or 12 months
  • Usually offer low introductory interest rate
  • Lower mortgage payments at the beginning during introductory low interest rate

4. Borrower's Credit

Your credit is one of the key factors influencing the interest rate on your loan. When you apply for a home loan, lenders will analyze your credit history and credit score to determine whether or not to approve a loan and what kind of rates to offer you. A high credit score tells lenders that the borrower poses a low risk for default, while a low credit score translates to higher risk. Thus, borrowers with higher credit scores are able to get loans at lower interest rates.

Learn more about credit by reading the "credit education" section on this site.

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