Homebuyers who are tired of waiting for lower mortgage rates can take concrete steps now to get a better deal on their own, according to a new report from the Realtor.com® economic research team.
Altogether, the four steps examined in the report can lower a borrower’s mortgage rate by nearly 150 basis points, or 1.5 percentage points. On a $500,000 home purchase with 20% down, that equates to a savings of $400 per month, or $4,800 annually.
Shopping around for the best rates yields the biggest average rate savings, of 86 basis points. Improving your credit score to at least Very Good (750-plus) can shave off an average of 39 basis points. And increasing your down payment to at least 20% of the purchase price, while keeping a debt-to-income ratio of less than 30%, reduces rates by a combined 22.5 basis points.
These findings come as average rates on 30-year fixed mortgages hover just below 6.5%, according to Freddie Mac. That’s down from the recent peak of 7.79% reached last year, but still more than double the average rates three years ago.
Following a tightening cycle to fight inflation, the Federal Reserve is expected to begin cutting its benchmark rate next month, after Fed Chair Jerome Powell recently announced that “the time has come for policy to adjust.” That will bring down borrowing costs, including mortgage rates, though how far and how quickly they fall remains to be seen.
“Certainly, the 10-year Treasury and Fed’s target policy matter a lot to mortgage rates,” says Realtor.com senior economist Ralph McLaughlin, the author of the new report. “But I think the real big takeaway here is, those aren’t the only things that matter. In fact, there are things that borrowers can do themselves to lower their mortgage rate.”
To calculate the impact on mortgage rates, Realtor.com analyzed more than 2 million mortgage originations between 2022 and 2023 using Freddie Mac’s Single-Family Loan-Level Dataset and statistical methods that allow us to determine what factors most influence a borrower’s mortgage rate at origination, all else being equal.
Here’s more information on four easy ways to secure a lower rate:
1. Shop different mortgage lenders
One of the most impactful ways to lower your mortgage rate may also be the easiest: getting quotes from multiple lenders to find the best deal.
The average difference between the highest rate and lowest rate offered to buyers who sought multiple offers was 86 basis points, the study found.
“It was surprising to see how much shopping around matters,” says McLaughlin. “We’re pushing a full percentage point there just by shopping around.”
It may also be surprising that most homebuyers don’t search for the lowest rate, but rather accept the first offer they receive.
A May study from LendingTree found that 54% of homebuyers who took out a loan for their most recent home purchase received only one offer.
By generation, baby boomers were the least likely to comparison shop, with just 28% doing so compared with 62% of millennials, the study found. According to LendingTree, nearly half of homebuyers who received multiple offers said they were able to secure a lower rate than the first offer they received.
Realtor.com offers a mortgage comparison tool to compare rates and fees from different lenders.
2. Raise your credit score
The average credit score in the U.S. was 705 as of March 2024, according to Equifax. That’s considered Good, but it is lower than the scores needed to secure the best mortgage rates.
Our study found that on average, borrowers with a Very Good or Excellent credit score (above 750) receive mortgages that are 39 basis points lower than borrowers with Bad credit scores (less than 650).
Raising your credit score can be easier said than done, but there are practical ways to boost your score in a relatively short period.
Continuing to make on-time payments is key. Another crucial factor is limiting the share of available credit being used at any given time. Maxing out your credit card can seriously weigh on your credit score, even if you pay off the full statement balance each month.
Keeping your credit utilization ratio below 30%, by either using your credit card less or expanding your line of credit, can lead to rapid improvements in your credit score.
3. Lower your loan-to-value ratio to 80%
In the first quarter of 2024, the average down payment was 13.6% of the total home purchase price, according to the Realtor.com economic research team. The median down payment amount was $26,000.
A down payment of 20% lowers your loan-to-value ratio to 80%, meaning that the loan amount is for 80% of the home’s value. According to the new report, mortgage applicants with a loan-to-value ratio of less than 80% receive mortgage rates that are 18 basis points lower than applicants with a loan-to-value ratio of over 95%.
As well, achieving a loan-to-value ratio of 80% often eliminates the need for private mortgage insurance, further reducing the cost of monthly payments.
4. Keep your debt-to-income ratio below 30%
Finally, the study finds that maintaining a debt-to-income ratio of less than 30% offers marginal improvements in mortgage rates. The figure refers to the share of monthly income devoted to debt payments, including student loans, auto loans, and credit card debt.
On average, mortgage applicants with debt-to-income ratios of less than 30% receive mortgage rates that are 4.5 basis points lower than applicants with a debt-to-income ratio of over 43%, the study found.
Although it offers only marginal direct benefits to obtaining a lower mortgage rate, lowering your debt-to-income ratio can also significantly boost your credit score, providing additional benefits to the mortgage borrower.
Read more at Realtor.com
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