Mortgage rates for 30-year, fixed-rate loans have recently surpassed 6%, a significant increase from the low point of approximately 2.6% observed at the beginning of 2021. This rise in rates adds further difficulty to an already challenging housing market, characterized by record price increases. Prospective homebuyers now face an even greater hurdle in affording homes.
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 a home in Council Bluffs.
Use Points
Paying for discount points upfront can lower your mortgage interest rate. Each discount point costs 1% of your loan amount. For example, if you borrow $300,000, one discount point would cost $3,000, resulting in a 0.25% reduction in your interest rate. The general guideline is that you can buy down your rate by 0.25% for each discount point. However, the actual savings may vary depending on your lender’s pricing.
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
During periods of increasing interest rates, some buyers may opt for an adjustable-rate mortgage (ARM). Lenders typically offer ARMs with fixed initial rates for a specific period, ranging from three to ten years. These initial rates, known as teaser rates, are usually lower than those of fixed-rate mortgages. However, once the fixed-rate period expires, there is a possibility of the rate being adjusted, potentially resulting in higher rates and monthly payments.
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
Making a larger down payment has several benefits. Firstly, it reduces the risk associated with borrowing, resulting in a lower interest rate. Additionally, a higher down payment leads to a lower monthly payment. Lastly, if you can make a down payment of at least 20%, you can avoid private mortgage insurance.
Compare Loan Products
When comparing different types of loans, such as VA, FHA, conforming, or USDA loans, you may find that you can qualify for a lower interest rate with little to no down payment. If you have fair to poor credit, FHA loans are generally cheaper. However, if you have excellent credit, conforming loans typically offer lower interest rates.
Get a Shorter-Term Loan
Lenders provide mortgage loans with 15 or 20-year terms, offering a lower interest rate compared to a 30-year loan. This can range from 0.5-0.75% cheaper. Additionally, opting for a shorter-term loan allows you to build equity at a faster rate and pay less interest over its duration. However, it is important to note that shorter-term loans come with higher monthly payments.
Work with a Broker
Working with a mortgage broker instead of a lender or bank can be a way to beat high interest rates. Mortgage brokers have access to various programs and can help you find the best one for your needs. Additionally, they often get loans at wholesale prices, which can result in savings for borrowers.
Visit our blog every week for more real estate advice and local information about Council Bluffs and surrounding areas. Does your current home still suit the needs of your family? Maybe it’s time to upsize into something that fits your growing needs, or downsize to something more suitable? If you’re ready to make a move, let’s be sure to connect. You can contact me at 402-981-6999 or email me at [email protected]
