Want a 5% Mortgage Rate? These 7 Moves Could Get You There

CNET

5 hours ago

Tharon Green/CNET
Over the last several years, record-high home prices and high mortgage rates have made homeownership unaffordable. As 30-year fixed mortgage rates remain flat near 7%, homebuyers have been finding creative ways to score rates below what lenders advertise.
Last year, nearly half of buyers purchased a home at a rate below 5%, according to Zillow.
"With borrowing costs elevated, buyers can take steps to reduce their housing expenses by securing a lower mortgage rate," said Hannah Jones, senior research analyst at Realtor.com.
The market forces that influence mortgage rates are out of your control. Yet proven strategies like optimizing your credit score, making a larger down payment, shopping around and negotiating with multiple lenders can save you up to 1.5% on your personalized rate.
Mortgage rates aren't expected to drop below 6% in 2025. Snagging even a 1% reduction in your rate can translate to about 10% savings on your monthly mortgage payment and tens of thousands of dollars in savings over the course of your loan.
Here's how homebuyers can get lower interest rates in today's housing market.
1. Increase your credit score
If your credit needs work, consider taking steps to raise your credit score before applying for a mortgage.
Lenders look at your credit score to decide whether you qualify for a home loan and what interest rate you receive. FICO credit scores range from 300 to 850, with 850 being the best score possible. Higher credit scores show you've managed debt responsibly in the past, so it lowers your risk to a lender. This can help you secure a lower interest rate and save big.
"The best mortgage rates and products are typically reserved for those with a credit score of 740 or better," said Sarah DeFlorio, vice president of mortgage banking at William Raveis Mortgage.
According to a 2024 Lending Tree study, when borrowers moved from the "fair" credit score range (580 to 669) to the "very good" range (740 to 799), they shaved 0.22% percentage points off their interest rate. That rate difference helped borrowers save $16,677 over the lifetime of a home loan.
2. Make a bigger down payment
Your down payment is the amount of money you contribute to your home purchase upfront. Each type of home loan comes with a minimum down payment, usually ranging from zero to 5%, but a higher down payment means a cheaper interest rate. That's because the lender takes on less risk when you contribute more toward the loan.
Because a down payment lowers your mortgage rate and builds your home equity, home loan experts often recommend making a large down payment of at least 20%.
3. Take out an adjustable-rate mortgage
An adjustable-rate mortgage, or ARM, is a home loan with a fixed rate for a set introductory period, such as five years. Once that period ends, the interest rate can go up or down in regular intervals for the remaining term.
The big appeal of ARMs is that the introductory interest rate is often lower than the rate on traditional mortgages. In general, the average 5/1 ARM rate is about 0.5% lower for the first several years than the average rate for 30-year fixed-rate mortgages.
4. Negotiate your mortgage rate
When you're applying for mortgage loans, you don't have to go with the company that did your preapproval. In fact, research shows that getting rate quotes from multiple lenders and comparing offers can result in significant savings.
If you want to use this strategy, start by submitting a mortgage application with lenders that fit your criteria. Once you have a few loan estimates in hand, use the best one to negotiate with the lender you want to work with.
The loan officer may lower your rate, help you save on closing costs or offer other incentives to get you onboard. In a 2023 LendingTree survey, 39% of homebuyers negotiated the interest rate on their most recent home purchase. Out of that pool of buyers, 80% were able to get a better deal.
5. Choose a shorter home loan term
Nearly 90% of homebuyers choose a 30-year fixed mortgage term because it offers the most flexibility and monthly payment affordability. Payments are lower because they're stretched over a longer timeline, but you can always put more toward the principal here and there.
But when you take out a longer-term home loan, "you're holding up the lender's money, and there's an opportunity cost for the funds to be invested elsewhere," said Nicole Rueth, SVP of the Rueth Team Powered by Movement Mortgage.
Shorter loan terms, such as 10-year and 15-year mortgages and ARMs, have lower interest rates, so you can reduce your rate now.
Choosing a shorter repayment term could help you save money because you'll be paying less in interest over the long term. But don't make the homebuying mistake of choosing a shorter loan term just for the lower rate. Shorter loan terms mean you'll have less time to repay the money you borrow, resulting in higher monthly payments, so it's important to ensure they fit within your budget.
6. Buy mortgage points
A mortgage point, also known as a mortgage discount point, is an upfront fee you can pay the lender in exchange for a lower interest rate on your home loan.
Each point costs 1% of the purchase price of a home and usually knocks the rate down by 0.25%. On a $400,000 home, you'd pay $4,000 for one discount point. The lender may even allow you to buy four mortgage points to lower the rate from 7% to 6%, although you'd have to shell out $16,000 to get there.
To check whether this strategy is worthwhile, take the total cost of the points and compare it to the overall monthly savings. In this case, when you pay $16,000 to buy four points and save $210 per month, it would take you more than six years to reach your break-even point.
Some experts encourage putting any extra money you have toward a down payment instead of buying points. That's because if you sell the home or refinance before reaching your break-even point, you lose money. But the amount you spent on your down payment becomes part of your equity.
7. Get a temporary mortgage rate buydown
A temporary mortgage rate buydown involves paying a fee at closing to lower your interest rate for the first few years of your loan term. Because of the considerable upfront cost, this strategy only makes financial sense when someone else pays that fee. Home builders, sellers and even some lenders may offer to cover this type of buydown to boost sales, especially when market rates are elevated.
For example, a lender may offer a "3-2-1" buydown, where the interest rate is slashed by 3 percentage points in the first year, 2 percentage points in the second year and 1 percentage point in the third. Starting in the fourth year, you pay the full rate for the rest of the loan term.
Buyers often choose a temporary buydown and plan to refinance later. Your buydown funds are refundable, and you can use them toward closing costs when you refinance (if rates do drop).
What is a 'good' mortgage rate?
The majority of US adults would consider purchasing a home if rates were to drop to 4% or below. Yet most mortgage forecasts don't project average rates falling drastically short of a major economic downturn or global catastrophe.
In a historical sense, a good mortgage rate is generally at or below the national average. Since 1971, the 30-year fixed mortgage rate has averaged 7.72%, according to Freddie Mac. In the last year, average mortgage rates have mostly fluctuated between 6% and 7%.
Affordability is relative to 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," said 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 speak with a few different lenders and brokers and then compare their quotes against the daily or weekly averages.
Buying a home is a personal decision, so it should feel right for your situation and budget. As you shop for a home, consider multiple strategies to lower your rate. A mortgage calculator can help you estimate what you'd pay each month.
Read more: Still Chasing 2% Mortgage Rates? Here's Why It's Time to Let Them Go
Watch this: 6 Ways to Reduce Your Mortgage Interest Rate by 1% or More
02:31