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What may seem like a small change in your interest rate can be the difference between saving and spending hundreds of dollars each month for years to come. And with mortgage rates near long term lows, there’s a good chance you can refinance to reduce that rate.

By lowering your interest rate, you’re saving money on your monthly mortgage payment. But the even better value is the ability to reduce the amount of interest you will pay over the life of your loan. Consider this example.

Let’s say you have a $400,000 loan at 4.25% over 30-years.

Your monthly payment (not including taxes and insurance) would be $1,968, and the total interest paid would be $308,393.

Now let’s say you got the same $400,000 loan, but at 4% interest rate. This monthly payment (not including taxes and insurance) would be $1,910, and your total interest paid would be $287,478.

You may be thinking that an extra $58 a month might not be worth it. But over the 30-year life of that loan, you’ll save $20,915 in interest!

Mortgage refinance

To obtain a lower rate, you’ll need to refinance your mortgage. Keep in mind you’ll end up paying closing costs again, which can include bank fees, appraisal fees, and attorney fees, among other things. These costs typically run around 2% of your total mortgage balance, although that can vary.

Before jumping on any lower interest rates, take the time to understand your credit score, current finances, and future goals. You’ll want to do everything you can to have a strong financial profile, so you’re able to obtain the most competitive rate. You’ll also want to do your homework and calculate exactly how much refinancing could actually save you.

Tip: Some mortgage lenders may require you reset your loan back to 15 or 30-years. Be sure to shop around, and choose a lender who will design your new loan around a shorter, custom term. Otherwise, you’ll be paying more toward interest.

4 strategies to secure a lower rate

Strengthen your credit

The better your credit score, the better your mortgage rate. This is because banks want to see a proven history of you utilizing and repaying debts on time. It makes you reliable.

Using a loan savings calculator from myFico, you can see just how much your credit score impacts the interest you’ll pay on your loan.

Although it’s up to the specific lender to determine what score a borrower must have to be offered the lowest interest rates, as you can see from the myFico calculator, the difference of a few points on your credit score can affect your monthly payments by hundreds of dollars.

Shop around

Different lenders offer different rates. According to a Consumer Financial Protection Bureau (CFPB) report, the difference between the average person's mortgage rate and the lowest rate available to them can come at a cost of an extra $300 a year. That means paying an extra $9,000 over a 30-year mortgage.

If you’re worried about too many credit checks, don’t be. FICO scores ignore mortgage, auto, and student loan inquiries made in the 30 days prior to scoring. So, if you find a loan within 30 days, the inquiries won't affect your scores while you're rate shopping.

Shorten your term

While most homeowners opt for a 30-year mortgage, it’s important to know that shorter loan terms are often eligible for better interest rates. You’ll pay a little more each month to fulfill your loan obligation faster, but because lenders recoup their money faster, they can charge you less in interest.

Consider an ARM

Interest rates can be fixed or adjustable. Adjustable-rate mortgages (ARMs) usually start off with a low, introductory interest rate before they adjust to the current market rate. Fixed rates, on the other hand, stay the same over time and because they’re less risky, they tend to carry higher rates than an ARM.

If you’re mobile and plan to move before the end of the introductory fixed-rate period, or you expect a raise or increase in income in the near future, an ARM may be worth consideration. Just be sure your lender explains some worst-case-scenarios so that you aren’t blindsided by payment adjustments. Ready to lower your rate? Start here.

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