What actually moves your interest rate down

Your interest rate comes down when you become a lower-risk borrower to the lender, or when market conditions shift in your favor. The lender sets your rate based on three things: how likely you are to repay (your credit score and debt history), how much you're borrowing relative to the home's value (your down payment size), and what the broader mortgage market is doing that week.

You can't control the market, but you can control the first two. A higher credit score, a larger down payment, a shorter loan term, or a switch to a different loan type can all lower your rate. Some of these changes happen before you close; others happen after you already have a mortgage.

Key Takeaways

  • Improving your credit score before you apply for a mortgage can lower your rate by 0.5 to 1 percentage point, depending on how much your score rises.
  • Putting down 20 percent or more typically qualifies you for better rates than putting down less, because the lender's risk is lower.
  • Refinancing lets you replace your current mortgage with a new one at a lower rate, but you pay closing costs again, so the math only works if rates have dropped enough.
  • Paying points (prepaid interest) at closing can lower your rate, but you need to stay in the home long enough for the monthly savings to cover what you paid upfront.
  • Shopping with multiple lenders for the same loan type within a two-week window counts as a single credit inquiry, so comparing rates doesn't damage your score.

Raising your credit score before you apply

Your credit score is the single fastest lever you control before closing. Lenders typically offer their best rates to borrowers with scores of 740 or higher. Each 20-point jump below that can cost you 0.125 to 0.25 percentage points on your rate.

The main score-builders are: paying bills on time for the next few months, paying down credit card balances (especially high ones), and not opening new credit accounts right before you apply. If your score is below 700, waiting three to six months while you pay down debt and make on-time payments can meaningfully lower your rate. If it's already above 740, further improvements may not move the needle much.

Check your credit report for errors at annualcreditreport.com, the only free source authorized by federal law. Dispute any mistakes directly with the credit bureau—Equifax, Experian, or TransUnion—not with the lender. Corrections can take 30 days.

Increasing your down payment

A larger down payment reduces the lender's risk because you have more skin in the game. Borrowers who put down 20 percent typically get better rates than those who put down 10 percent, who get better rates than those who put down 5 percent or less.

The difference is usually 0.25 to 0.5 percentage points between the 20 percent tier and the 10 percent tier. Below 20 percent, you'll also pay private mortgage insurance (PMI), which is an extra monthly fee that protects the lender if you default. PMI typically costs 0.5 to 1 percent of your loan amount per year, split into monthly payments.

If you don't have 20 percent saved yet, you have two paths: delay closing until you do, or close now with a lower down payment and refinance later once you've built equity. Refinancing has its own costs, so run the numbers before you decide.

Refinancing your current mortgage

If you already have a mortgage and rates have dropped, you can refinance—take out a new loan to pay off the old one. Your new lender pays off the old loan, and you start making payments to them instead.

Refinancing makes sense when the new rate is at least 0.5 to 1 percentage point lower than your current rate, because you'll pay closing costs again (typically 2 to 5 percent of the loan amount). If you're refinancing a $300,000 loan, closing costs might run $6,000 to $15,000. You need to stay in the home long enough for your monthly savings to cover that upfront cost.

For example: if your monthly payment drops by $150 and closing costs are $9,000, you break even after 60 months (5 years). If you plan to sell or move within that window, refinancing probably isn't worth it. Most lenders let you refinance as soon as 6 months after your original closing, though some require 12 months.

Paying points to lower your rate

Mortgage points are prepaid interest. One point costs 1 percent of your loan amount and typically lowers your rate by 0.25 percentage points. Two points cost 2 percent of the loan and lower your rate by roughly 0.5 percentage points. You pay points at closing, added to your other closing costs.

Points make sense if you plan to stay in the home long enough for the monthly savings to cover what you paid upfront. On a $300,000 loan, one point costs $3,000. If it lowers your payment by $50 per month, you break even after 60 months. If you sell in 10 years, you come out ahead. If you sell in 3 years, you lose money.

Some lenders offer "lender credits" that work in reverse: you accept a slightly higher rate in exchange for the lender paying some of your closing costs. This is useful if you don't have cash on hand for closing but plan to stay long-term.

Choosing a shorter loan term

A 15-year mortgage has a lower interest rate than a 30-year mortgage for the same borrower, because the lender's money is at risk for half as long. The rate difference is usually 0.25 to 0.5 percentage points.

The tradeoff is your monthly payment. On a $300,000 loan at 6.5 percent, a 30-year mortgage costs about $1,896 per month; a 15-year costs about $2,596. That extra $700 per month is the price of the lower rate.

A 15-year mortgage makes sense if you can comfortably afford the higher payment and want to build equity faster and pay less total interest over the life of the loan. If the higher payment would strain your budget, a 30-year mortgage is the safer choice, even at a slightly higher rate.

Shopping with multiple lenders

Different lenders quote different rates for the same borrower on the same day. Shopping around can save you 0.25 to 0.5 percentage points, which on a $300,000 loan translates to tens of thousands of dollars over 30 years.

Get quotes from at least three lenders: a bank, a mortgage broker, and an online lender. Ask each one for the same loan type (30-year fixed, for example) so you're comparing apples to apples. Request a Loan Estimate, the standardized form that shows your rate, points, closing costs, and monthly payment.

When you request quotes within a 14-day window, all the credit inquiries count as a single inquiry for scoring purposes, so shopping doesn't damage your credit. After 14 days, each new inquiry is separate. Don't apply for new credit cards or car loans while you're shopping for a mortgage—each one is a separate inquiry that lowers your score.

Frequently Asked Questions

How much does my credit score need to improve to see a rate change?

Most lenders have rate tiers at 20-point intervals (620–639, 640–659, 660–679, and so on). Moving from one tier to the next usually changes your rate by 0.125 to 0.25 percentage points. A 40-point jump might save you 0.25 to 0.5 percentage points. The exact impact depends on the lender and the loan type.

Can I refinance if I have less than 20 percent equity in my home?

Yes, but you'll pay PMI on the new loan just as you did on the original one. Some lenders offer cash-out refinances where you borrow against your equity, which can lower your rate if you're pulling out enough to reach the 20 percent equity threshold. Run the numbers with your lender to see if it's worth the extra borrowing.

What's the difference between a fixed rate and an adjustable rate?

A fixed rate stays the same for the entire loan term. An adjustable rate (ARM) starts lower but increases after an initial period (typically 3, 5, 7, or 10 years). ARMs are riskier because your payment can jump significantly when the rate adjusts. Most borrowers choose fixed rates for predictability, even though the starting rate is higher.

Do I need to refinance with the same lender?

No. You can refinance with any lender. Shopping around for a refinance works the same way as shopping for an original mortgage—get quotes from multiple lenders and compare the rate, points, and closing costs on the Loan Estimate form.

What happens to my old mortgage when I refinance?

Your new lender pays it off in full on the day you close the refinance. You receive a payoff statement from your old lender showing exactly how much is owed. After closing, you make payments only to your new lender. The old loan is closed.