First-Time Buyer Tips: Getting a Lower Mortgage Rate in a High-Rate Environment

Introduction to getting a lower mortgage rate

It’s a difficult time for first-time home buyers. When this was written, we were seeing some of the highest mortgage rates this century.

Normally, high mortgage rates drive home prices lower, simply due to supply and demand. But that wasn’t happening this time. That’s because, as demand dropped as a result of affordability issues, supply shrank, too.

The New York Times recently explained this phenomenon under the headline, “A Huge Number of Homeowners Have Mortgage Rates Too Good to Give Up.” If you locked your mortgage rate at the start of 2021 at 2.65% or the start of 2022 at 3.22%, you, too, wouldn’t want to swap to today’s average rate. That’s the 7.17% reported by Freddie Mac for the week ending Apr. 25, 2024. So, many homeowners may not want to give this up.

All this means today’s first-time buyers face a double whammy of high mortgage rates and high home prices. Still, plenty are determined to fulfill their homeownership dreams. So, how can they go about getting a lower mortgage rate?

In this article (Skip to...)

• Why are mortgage rates so high?
• Ways to lower your mortgage rate
• The bottom line

Why are mortgage rates so high?

Inflation

The main driver of high mortgage rates is hot inflation. Mortgage rates are largely determined by trading in a specialist market for a type of bond called a mortgage-backed security (MBS).

All bondholders receive a fixed income throughout the life of their bonds. And high inflation whittles down the value of that income, year, after year, after year. So, understandably, they hate inflation and require a higher bond yield (meaning a higher mortgage rate) to carry on buying MBSs.

The Fed

Meanwhile, the Federal Reserve is charged with keeping inflation low. And it responded to the Covid-driven bout of inflation by hiking general interest rates repeatedly.

The Fed doesn’t directly set mortgage rates. But its general rate policies certainly affect the MBS bond market that does. And it’s unlikely that mortgage rates will fall consistently until a Fed cut to general interest rates is imminent.

The economy

Meanwhile, the economy, too, plays a part in influencing mortgage rates. Those tend to rise when it’s thriving and fall when it’s struggling.

That’s because, when the economy’s in trouble, investors flee rewarding but risky stocks for the haven of dull but safe bonds.

6 routes to getting a lower mortgage rate

You can’t do much about inflation, the Fed or the economy. But here are six actions you could take that should see you getting a lower mortgage rate than others like you will pay.

1. Improving your credit score

For many, raising their credit score is the single most important issue to address. Because your credit score has a huge impact on your mortgage rate.

How huge? Well, we visited the MyFICO.com website’s Loan Savings Calculator to see.

We said we wanted the nationwide average for a $300,000, 30-year, fixed-rate mortgage. Of course, we got a snapshot only of how things stood on the day of our visit. Mortgage rates move up or down all the time so the numbers may be different when you visit. But the differentials are likely to be much the same.

How much might a high credit score save you?

MyFICO reckons someone with a 760-850 FICO credit score might get that mortgage with a 6.953% rate. They’d pay $1,986 a month and a total of $415,121 in interest over the lifetime of the loan.

But someone with a 620-639 FICO credit score might get an 8.542% rate. They’d pay $2,316 a month and a total of $533,643 in interest over the lifetime of the loan.

So, the higher score saves $330 a month in that scenario. And the person with the low score would pay $118,522 more in interest over 30 years. Meanwhile, a higher score would put you in line for lower rates on credit cards, personal loans, auto loans and almost all your future borrowing.

How to get a higher credit score

Read How to Raise Your Credit Score Fast for fuller details. But the main ways to drive your score upward include:

1. Pay all your bills on time
2. Keep your credit card balances below 30% (10% preferably) of their credit limits. Better yet, zero those balances each month
3. Don’t open or close credit accounts unnecessarily, especially in the months before a loan application
4. Get a copy of your credit report only from the Annual Credit Report website. By law, you’re entitled to one free annually from that site, which is owned by the Big 3 credit bureaus
5. Check your report carefully and dispute all errors (unless they’re in your favor!). Your score might move appreciably higher

Start taking your credit score seriously now. The longer you have to improve it before your mortgage application, the higher you should be able to make it.

2. Getting a lower mortgage rate by shopping around and negotiating with lenders

In May 2023, federal regulator the Consumer Financial Protection Bureau published a startling report. It said, “Mortgage data shows that borrowers could save $100 a month (or more) by choosing cheaper lenders.”

So, be sure to get quotes from multiple lenders. Make a short list of the most promising and start calling around. Mortgage quotes aren’t set in stone and you’re free to negotiate your best possible deal.

By all means, call Lender x and say, “I really want to go with you but Lender y is offering lower closing costs (or mortgage rate or whatever). Are you able to help me?” Feel free to play one against the other until you’re sure you can’t wring out any more concessions.

3. Increasing your down payment

The minimum down payment your mortgage lender requires may typically be 0%, 3% or 3.5%, depending on which type of mortgage you’re applying for. But you are always free to pay a bit (or a lot) more.

Lenders like higher-than-required down payments because it shows your commitment to responsible borrowing. And it means you have more skin in the game, which makes you a lower-risk borrower.

So, most are likely to offer you a lower mortgage rate if you exceed the required minimum.

4. Getting a lower mortgage rate by choosing your type of mortgage carefully

There are at least 10 types of mortgages. The most common for first-time buyers are:

• Conventional loans from Fannie Mae or Freddie Mac
• FHA loans
• VA loans
• USDA loans

Be sure to explore all your options before choosing your loan type. They each have their own pros and cons, including higher or lower average rates, and you need the one that suits you best. (Hint: If you’re eligible for a VA loan, that’s likely your best choice.)

5. Negotiating buydowns and buying discount points

If you have a friendly or motivated seller, you may be able to negotiate a mortgage buydown. The seller agrees to pay your mortgage lender to reduce your mortgage rate for the first one, two or three years of the loan.

This can be great for first-time buyers because it gives them a breather to get back on their financial feet before the big costs of homeownership begin. However, you can’t insist on the seller paying this, so you need to do some clever negotiating.

Discount points are a little different. You typically pay for those on closing. And they buy you a lower rate over the lifetime of the loan. With mortgage rates currently so high, discount points are popular among those who can afford them.

6. Taking advantage of first-time home buyer programs and grants

Thousands of organizations across the United States offer down payment assistance programs. Many are run by state governments using federal funds. But some are private. And first-time buyers are often first in line.

These can contribute cash toward your down payment and sometimes closing costs. The money may come in the form of a grant, a forgivable loan or a low-interest repayment loan, depending on the organization providing it.

In itself, this doesn’t directly help in getting a lower mortgage rate. But, if your assistance lets you keep some or all of your savings, you could use that money to buy discount points or increase the size of your down payment.

Getting a lower mortgage rate: The bottom line

You can’t do much about inflation, the Fed or the wider economy. Mortgage rates are high and it may be time to readjust our perspective to the new normal of higher rates.

But you can do a lot to improve your chances of getting a lower mortgage rate than other first-time buyers must pay. See which of our six tips and tactics could help and act upon the ones you can use:

1. Improve your credit score
2. Shop around and negotiate with lenders
3. Make a bigger down payment than the minimum
4. Choose your type of mortgage carefully
5. Negotiate a buydown or purchase discount points
6. Use down payment assistance programs

It’s been a difficult couple of years for first-time buyers. And many have taken a pause on their homeownership dreams. So, well done for not giving up on yours. Just use the time you have before you buy wisely by getting yourself into as good financial shape as you can.