Mortgage rates on 30-year, fixed-rate loans have now gone above 6%, from a low point of around 2.6% at the start of 2021. Affording homes was already a challenge, with record price increases, and now it’s become even harder for would-be buyers.
The Fed has been clear that it will take the necessary steps to cool inflation, which could mean more rate hikes on the horizon and no relief in site for buyers.
So, what can you do to beat high interest rates on mortgages?
The following strategies could help you get a lower rate on a new home if you’re planning to buy.
You can pay for discount points upfront, which will help you lower your mortgage interest rate. Every discount point costs 1% of the amount of your loan. If you want to borrow, say, $300,000, one discount point costs $3,000. That would lower you by 25 basis points, or 0.25%.
The typical rule of thumb is you can buy your rate down 0.25% for each discount point. Lenders set their own pricing, so your savings could be more or less depending on your lending company.
You need to calculate to see if buying points will work for you. To do this, divide the buydown cost by your monthly savings, which will let you calculate your point of breaking even.
If you’re paying $3,000 for a discount point and save $100 a month on your payment, then your breakeven point would be 30 months. To get back your buydown cost, you have to stay in your home for at least that long.
Think About An Adjustable-Rate Mortgage
When there’s a spike in interest rates like what’s going on now, some buyers will consider an adjustable-rate mortgage (ARM).
Lenders often have ARMs with fixed initial rates for a certain period, anywhere from the first three to the first ten years of a loan. These are called teaser rates, usually lower than the rate charged on a fixed-rate mortgage.
Once your fixed-rate period ends, the downside is that your rate can be adjusted, which can mean you have a higher rate and monthly payment in the future.
If you stay in your home for a shorter period of time, then an ARM can make sense. There are also lifetime and yearly limits on how much your payment can go up over time.
Make a Bigger Down Payment
If you can make a more significant down payment, you’ll be seen as a less risky borrower, earning you a lower interest rate. You’ll also have a lower monthly payment if you can increase your down payment, and if you make a down payment of at least 20%, you’ll avoid private mortgage insurance.
Compare Loan Products
You might get a lower interest rate while making little to no down payment if you compare the types of loans you can qualify for, like a VA, FHA, conforming, or USDA loan. FHA loans are cheaper if you have fair to poor credit, but conforming loan rates will usually have lower rates if you have excellent credit.
Get a Shorter-Term Loan
Lenders offer mortgage loans with 15 or 20 years terms instead of 30 years. If you get a 15-year loan, the interest rate is typically anywhere from 0.5-0.75% cheaper than comparable rates on a 30-year loan.
You’ll also build equity faster with a shorter-term loan and pay less interest over its life.
The downside of a shorter-term loan is higher payments.
Work with a Broker
Finally, another way you might be able to beat high interest rates is by working with a mortgage broker instead of a lender or bank. Mortgage brokers can help you find the best program for your needs. Frequently mortgage brokers will also get their loans at wholesale prices, and you can gain the advantage of some of those savings as a borrower.