How to lower your interest rate

Advertisements for home loans are packed with eye-catching interest rates that oftentimes seem to be too low to be true. And in fact, those rock-bottom rates aren't available to most borrowers.

Yet some people are able to borrow money at attractive rates. Here are some strategies that can help you accomplish that objective:

1. Strengthen your credit score
Lenders rely on your credit report and credit score to assess your willingness and ability to repay your debts. The credit report is a history of how you've handled debt over time, and the credit score is a numerical representation of the information in your credit report.

If your score is high, lenders will offer their most attractive interest rates to you. If your score is middling or worse, lenders will dig into your credit history and then decide what rates to offer to you.

Lenders may give special attention to whether you made any late mortgage payments in the past 12 to 24 months. If you did, the lender then will assess the number and duration of those "mortgage lates" along with other factors. Be prepared to explain why your payments were late and to produce supporting documentation for your explanation.

Be upfront about your credit history because problems that are discovered later can disqualify you from certain loan programs or interest rates or derail your loan application altogether. Positive factors, such as a lengthy credit history or stable employment, can offset negative factors to some extent.

2. Shop around for lower interest rate
Regardless of your credit score, you should shop around for the best rate that's available to you on the type of loan you want. Ask several lenders to give you a Good Faith Estimate, which you can use to compare the costs of each loan. If you're shopping for an adjustable-rate mortgage, compare loans that use the same index and shop for the lowest margin and rate caps.

3. Higher points mean lower interest rate
Another way to get a lower interest rate is to pay points, which are an upfront fee quoted as a percentage of the loan amount. (One point equals one percent of the principal.) An inverse relationship exists between points and the interest rate: Pay more points, the rate drops. Pay fewer or no points, the rate rises.

The decision of whether to pay points is essentially a math problem, though you might want to consider how long you intend to own the home and whether you have other immediate financial needs as well. To estimate how long it would take to recoup points, multiple your loan principal by the number of points, then divide the result by the monthly payment savings from having a lower rate. For more information, read about discount points.

4. Get a rate lock to stop floating
Interest rates change daily as conditions change in the financial markets. That means a rate offered to you one day might not be available another day. To escape this fluctuation of interest rates, request a rate lock. A lock, which typically lasts 30 or 60 days, can help you make sure you'll get a specific rate you've been offered. Some lenders charge a fee for a lock, and if there is a fee, it's likely to be higher for a longer lock period.

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