Five tactics for lowering your mortgage rate

When you first realize the cost of buying a home, you may experience some serious sticker shock. Or perhaps you're feeling overwhelmed by the monthly payments on your current mortgage. But you don't have to feel stuck with that price or your payments.

In order to save big over the life of your loan, you can try to negotiate another significant figure in the home buying process - your interest rate.

"It is important to realize that mortgage rates fluctuate constantly," says Joe Parsons, senior loan officer at California-based mortgage servicing company PFS Funding and author of its blog, "The Mortgage Insider."

"The normal fluctuations of the market from day to day are about 1/16 of a point from one day to the next. Some days the rates may be up a little, some days down a little," he explains. "Some lenders work on a lower profit margin than others, so their rates may be lower at any point in time."

So how can you take advantage of interest rates in constant flux? You must be willing to shop around and negotiate with lenders. But be realistic and knowledgeable about how much negotiating can lower your interest rate.

"Rates are always about .125 to .1 negotiable," says Bishoi Nageh, vice president of the Somerset branch of New Jersey-based Mortgage Network Solutions.

But how can you negotiate your way into a lower rate? Well, you can use any of the tactics outlined below as well as simple verbal negotiation. According to Nageh, lenders can play within a certain margin of interest rates when cutting deals with homebuyers.

So whether you're refinancing or looking for your first home loan, locking in a low interest rate is key to saving big bucks in the long run. For maximum savings, read on for our tips on how to negotiate your rate and how to spot what's too good to be true.

[Ready to refinance or take out a new home loan? Click to compare rates from multiple lenders now.]

Tactic #1: Pump up your credit score.

"Credit score, credit score, credit score!" That should be your battle cry when applying for a mortgage. According to Nageh, you should work on keeping this magic number high if you want to secure a competitive mortgage rate.

"On conventional loans, the biggest factor on rates is the credit score," explains Nageh. He says your rate is significantly affected by your credit score, which is split into the following tiers: 640-659, 660-679, 680-699, 700-719, and 720-740.

If you're in the top tier with a credit score of 720 or higher, you have the best chance at getting a lower rate, Nageh says. The logic behind that is the better your credit score, the less risk you pose to your lender. So lenders are more likely to offer you a lower rate, he explains.

What if your credit score isn't that great? Then working to improve it should be your goal, according to Parsons.

"Oftentimes, increasing a FICO score by just 10 points can save thousands of dollars in fees or get a better rate for the borrower," he says.

Not to worry if your significant other has less than perfect credit, says Thomas Nitzsche, a credit counselor and senior media relations coordinator at ClearPoint Credit Counseling Solutions, a Georgia-based credit and housing advice agency.

"If one person in a couple has bad credit, they can be left off the loan so long as the person with good credit can support the loan on their own income," explains Nitzche. "The person with the low credit score can still be on the title."

Tactic #2: Treat finding a lender like speed-dating.

You don't have to commit to the first lender you meet. Instead, treat your search for the right lender like speed-dating - keep your options open, meet multiple prospects, and don't settle for less.

How could this strategy help you secure a low rate? According to Nitzsche, you should absolutely shop around, because any difference in your interest rate can be more effective than you think.

"As far as going from lender to lender, the rate will usually be close but can depend upon who the investor of the loan is," says Nitzsche. "You can save money by shopping around with different lenders. One-fourth of a percentage point may not seem like much, but it could save thousands of dollars over the life of the loan."

[Ready to find the right lender? Click to compare interest rates now.]

But beware of any rate that sounds too good to be true, because it probably is. "Remember there is always a trade-off and a risk you take when you underpay for something," says Nageh. He adds that in the mortgage business, that trade-off is usually honesty and ethics.

So don't automatically go for the lender offering the lowest rate – working with someone you trust is just as important, he explains. For Nageh, looking for a lender with the best total package is key. When comparing your options, try to find a lender who is trustworthy, accessible, and offers competitive rates.

Tactic #3: Lock-in your rate as close to the closing date as possible.

So what do you do once you find the right lender and rate? Lock it down. More specifically, you should lock in your interest rate - otherwise known as a mortgage rate lock or lock-in.

According to the Federal Reserve, a rate lock is a lender's promise to hold a certain interest rate for a period of time while your loan application is processed, which protects you (the borrower) from potential rising interest rates during the application process.

In order to get the best interest rate, Nageh recommends asking your lender the following questions: What is the lock policy after a homebuyer locks? For example, is a float-down possible? That's the option to reduce a locked interest rate if rates fall during the lock period.

With lock-in rates, timing is also an important factor. A rate lock usually lasts as long as the mortgage application process. And the common rate lock period ranges from 30 to 60 days, but it could be longer, says Nageh. However, locking in your rate for a shorter term, as close as possible to your actual closing date, can be a smart financial move, he explains.

"Mortgage rates are costlier and higher for lengthier lock periods," because the longer a lender freezes a rate, the more time there is for interest rates to go up. That means you pose a higher risk of less profit for lenders in the long run since you're locked in at a lower rate.

Typically, lenders do not charge an actual fee to lock in a rate, but lenders will charge a higher rate the longer the lock. For example, the interest rate on a 30-day rate lock could be as high as 0.25 percent more than a 15-day rate lock, according to Zillow, an online real estate database.

So what's the take-home here?

"The interest rate quoted is always relative to the lock period," explains Nageh. "The longer you lock your interest rate, the more costly it gets. If you're closing is 90 days away, and you lock your rate for 90 days, that locked interest rate will be higher than [on] a 30-day lock period."

He explains that on a 90-day lock, a lender may give you an interest rate that's anywhere from 0.5 to 0.75 of a percentage point higher than on a 30-day lock.

Nageh's advice? "Most of my clients, depending on market conditions, will wait 20 to 30 days before the closing date to lock," he says.

Some other tips from Nageh: Get your rate lock in writing (so it's binding). And ask your lender upfront how long the application process will take to make sure the entire transaction can be completed during your lock period.

[Want to save on your mortgage? Click to compare lenders and rates now.]

Tactic #4: Offer a higher down payment.

Sure, this isn't a strategy for those with a cash flow problem. But if you've got a nice nest egg hiding out somewhere, offering a larger down payment may be a bargaining chip to lower your mortgage rate.

While our experts say that your credit score is the biggest factor involved in calculating your interest rate, a larger down payment decreases risk for lenders. And that does have an effect on your rate.

If you have a down payment of 25 percent or more in addition to a high credit score, you could reduce your interest rate by 1/4 of a percentage point, says Parsons.

But even if the rate reduction is small, your savings magnify over the life of the loan, whether it's a 15-year or 30-year term.

So the moral of the story - if you can afford a larger down payment, you could lock in a lower rate and that could help you save big over the life of your loan.

Tactic #5: When refinancing, loyalty pays off.

You know how small businesses - your local deli, the hardware store, and even your handyman - are sometimes willing to cut you a deal if you buy in bulk or if you're a repeat customer? Or how getting cable, internet, and phone service from one company is cheaper than from three separate ones? Believe it or not, customer loyalty can work in your favor when it comes to refinancing your mortgage, too.

"Loyalty is very important," says Nageh. "Lenders can waive administration fees, lock-in fees, and pay for some closing costs."

Why? Well, because you're bringing them more business and could continue to do so in the future, either on your next home purchase or through referring friends and family, Nageh explains.

How much will you save with this kind of repeat customer discount? While it's hard to put a number on it, fees associated with home loans, from processing to document preparation charges, can increase the total cost of the loan dramatically - by thousands, even.

So if you're looking to refi, you might want to consider calling your old lender, who might be willing to cut you a small break. Repeat business can be a major motivator, according to Nageh. "Most mortgage advisors are 100 percent commission, and a loyal book of business [clients] alleviates the hardest part of the job," he says.