Getting the Best Mortgage Rate in 2015 Requires Points, Excellent Credit

Earlier this morning, Freddie Mac reported that the average mortgage rate for a 30-year fixed-rate home loan had fallen to 3.59%. That’s close to a record low, and nearly a full percentage point lower than where we were at the start of last year.

But not everyone will qualify for this average. In 2015, getting the best mortgage rate requires excellent credit and, in most cases, the payment of discount points at closing.

As I write these lines, some borrowers in the U.S. are qualifying for home loan rates as low as 3.50%. That’s because they have higher credit scores than the average borrower, and/or they are paying more money up front in the form of discount points. While many factors can affect the amount of interest charged by lenders, these two factors tend to weigh the most.

Want to qualify for the best mortgage rates in 2015? You’ll probably need to check both of these boxes.

A Quick Recap of Current Interest Rates

As mentioned earlier, the average rate for a 30-year fixed mortgage loan recently fell to 3.59%. That’s a decline of 7 basis points (0.07%) from last week’s average, and a drop of 64 basis points (0.64%) from this time last year.

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This is exactly the opposite of what many economists were predicting a year ago. The general consensus this time last year was that mortgage rates would gradually rise during 2014, ending the year higher than they were at the beginning. As you can see from the chart above, just the opposite occurred. In fact, the average rate for a 30-year fixed mortgage fell by 0.66% during the 2014 calendar year (according to Freddie Mac’s industry-wide survey).

Currently, the average rates in the 15-year fixed and 5/1 ARM loan categories are both below 3%. These are historically low interest rates by any measure, and they offer a powerful enticement for home buyers and refinancing homeowners alike.

But remember — we are talking about averages here. Loan qualification and rate assignment are heavily influenced by individual factors as well. This means that some borrowers will land better-than-average mortgage rates, while others will pay more than these averages.

In 2015, as in the past, the best mortgage rates are reserved for borrowers with excellent credit and the willingness to pay more money up front in the form of discount points. So let’s talk about those two factors.

What it Takes to Get the Best Mortgage Rate in 2015

Getting the best possible rate on a mortgage loan could save you thousands of dollars over the life of the loan. Obviously, everybody wants that. But how do you achieve this lofty goal? What does it take to qualify for the lender’s lowest interest rates? Two of the most important factors are your credit score and the amount of points you pay at closing.

Let’s refer back to the Freddie Mac survey mentioned earlier. At present, the average mortgage rate for a 30-year home loan is around 3.59%. This is based on a nationwide survey of around 125 lenders. But the borrowers who secured these rates had to pay a certain amount of prepaid interest at closing. According to Freddie Mac, borrowers paid an average of 0.7 points at closing to secure these average rates.

This is a common strategy used by borrowers to get the best mortgage rates available. Essentially, you are paying more money up front to secure a lower rate over the long term. These “discount points,” as they are known, can be a money-saving strategy for borrowers who are planning a long stay. They allow you to “buy down” your interest rate in order to save money over the life of the loan.

One point equals one percent of the base amount being borrowed. So one point on a $200,000 home loan would come to $2,000. In exchange for this extra amount paid on the front end, lenders will offer lower interest rates over the term of the loan. There are other ways to negotiate for a lower rate, but this is the most common strategy in use today.

Does it makes sense in your situation? That will largely depend on how long you plan to stay in the house. If you only plan to keep the loan for a few years, this strategy probably won’t work out to your advantage. That’s because you could end up paying more in points than the amount saved during such a short stay. So time and savings are the primary considerations.

Learn more about mortgage points

Getting the best mortgage rate also requires an excellent credit score. There’s no magic number here, because lenders have their own standards and procedures for “risk-based pricing.” Generally speaking, borrowers need a score of 750 or higher to qualify for a lender’s lowest rates. But this is often factored in with any points that are paid, as explained above. So it’s a combination of these two factors that helps you get the best rates.

Note the distinction here. You don’t necessarily need an excellent credit score to qualify for a home loan (lenders are currently qualifying borrowers with scores in the low to mid-600 range, according to a recent industry survey). But you’ll need a strong score if you want to get the best mortgage rates in 2015. So we are talking about two different levels of qualification — one just to get your foot in the door, and another level for securing the lowest rate. There is a broad spectrum in between.