How to get a better rate on your mortgage

Mortgages are often one of the largest expenditures a household has. Such being the case, it makes sense to find ways to get a better rate on mortgage loans. Fortunately, several methods exist to obtain lower rates or at least work toward the goal of lower rates. The following techniques can be used toward obtaining a better rate on a mortgage.

• Mortgage Duration

Switching from a 30 year mortgage loan to a 20 or 15 year mortgage can also get you a better interest rate. This is because the lender will recover its money faster which in effect lowers its lending risk and lowering the rate. If a shorter-term mortgage is affordable, it can lead to a much faster payment of the principal value of the mortgage, and lessen overall loan cost significantly.

• Equity value

Increases in equity value, be they through market appreciation or extra payments into a mortgage can also lower lending risk. By having more value in a home, your chances of getting a better rate on your mortgage increases. This method is more likely to work if mortgage rates are steady or declining, as otherwise, the higher equity value is working against an increasing mortgage rate trend.

• PMI Insurance

Property Mortgage Insurance (PMI) is usually required on loans that have less than 20% of the total loan amount paid off. By surpassing this 20% requirement, PMI can be dropped leading to a lower monthly cost of the mortgage where PMI is included in the interest rate calculation. PMI can be lowered by making extra payments or by adding a down-payment on  a refinance. 

• Credit rating

A better credit rating usually leads to better interest rates so it follows a higher credit rating can lead to a better rate on a mortgage loan. If your credit rating isn't as high as it could be, it could be higher within a few months if basic, yet important steps are taken to rebuild credit rating.

• Refinance

Even with the same credit rating it may be possible to refinance at a lower rate if aggregate mortgage loan rates have moved down from the rate at which you originally financed your real estate. A refinance that drops Annual Percentage Yield (APY) 1% or more could be enough to cover any extra fees related to the refinance in addition to lowering total interest paid.

To get a better rate on a mortgage loan more than one of the above techniques may be used. This has the affect of compounding the value of the lower interest rate. For example, a home that is refinanced at a rate 1% lower than the original mortgage that is also reduced in duration by 5 years and has a down-payment that puts that principal higher than 20% lowers the interest in three ways. The total decline in interest rate may then, be higher than the original 1% lower refinance rate.