Mortgage rates are rising, but you can lower yours
Mortgage interest rates have been rising throughout 2022. That’s bad news for home buyers, but it doesn’t have to be the end of the line. There’s a lot you can do to fight rising interest rates and get a better deal on your mortgage loan.
Here are the best strategies to beat the market and secure a lower rate for your new home loan.
Nine ways to beat rising mortgage interest rates
While the overall interest rate market is rising, there are many steps buyers can take to lower their own personal mortgage rate. A few of the best strategies to beat rising interest rates include:
- Buying down your rate with points
- Considering an ARM with a low intro rate
- Using a shorter loan term
- Making a bigger down payment
- Choosing a different property
- Choosing a different loan product
- Making lenders compete
- Working with a mortgage broker
- Improving your credit
Here’s a little more detail about each strategy and how they can help you lower your mortgage rate, even in a high-interest environment.
1. Buy down your rate with points
You can lower your mortgage interest rate by paying for discount points upfront. Each discount point costs 1% of your loan amount. So if you are seeking to borrow $300,000, one discount point would cost you $3,000 and would typically lower your rate by 25 basis points (0.25%).
“The general rule is that you can buy your rate down 0.25% for every discount point you purchase,” says Denny Ceizyk, a mortgage expert with LendingTree in New York City. “However, lenders set their own pricing, so the savings may be more or less, depending on your mortgage company.
“To determine if purchasing points makes sense for you,” he adds, “divide your buydown cost by the monthly savings to calculate your breakeven point.”
For instance, if paying $3,000 for one discount point saves you $100 per month on your mortgage payment, your breakeven point would be approximately 30 months — or two and a half years. You would have to remain in the home for at least that long to recoup your buydown cost.
2. Consider an adjustable-rate mortgage
When fixed mortgage rates spike, some borrowers turn to adjustable-rate mortgages (ARMs). Many lenders offer ARM loans with initial teaser rates fixed for a set period — typically the first three, five, seven, or 10 years of a 30-year loan. These teaser rates generally are lower than the interest rate charged for a fixed-rate mortgage loan.
For example, on the day this was written (May 2, 2022), Freddie Mac’s average for a 30-year fixed-rate mortgage was 5.10% while the rate on a 5/1 ARM was just 3.78% — over a full percentage point lower.
The downside is that after your ARM’s initial fixed-rate period concludes, your rate can adjust based on a margin and index outlined in your loan’s paperwork. That can lead to a higher rate and monthly payment down the line.
“ARMs make sense if you plan to live in a home for a short period or want a lower monthly payment ahead of an expected salary raise or bonus,” suggests Ceizyk. “There are yearly and lifetime caps limiting how much the payment can go up over time. Before committing to an ARM, look closely for any prepayment penalties to avoid getting stuck in an ARM that doesn’t allow you to refinance without paying a fee.”
3. Use a shorter-term loan
Many lenders offer mortgage loans with shorter terms, such as 15 or 20 years. A 15-year loan often comes with an interest rate that is 0.5% to 0.75% lower than comparable 30-year rates, according to Ceizyk.
“Another benefit of selecting a shorter-term loan is that you will pay much less interest over the life of that loan and build equity in your home faster. So… you’ll save big on interest charges compared to a 30-year term,” he continues.
Keep in mind, though, that 15-year loan payments are significantly higher. That’s because you’re paying off the same loan amount in half the time. So run the numbers carefully and be sure you can comfortably afford the payments before committing to this type of loan.
To compare estimated payments and interest costs on a 15- versus 30-year loan, try a Home Affordability Calculator.
4. Make a larger down payment
“A larger down payment means you are a less risky borrower, which could mean a lower interest rate,” says Jennifer Chiongian, a real estate broker in New York City. In addition, a larger down payment will result in a lower monthly payment over the life of your loan.
Plus, by making at least a 20% down payment, you can sidestep paying for private mortgage insurance (PMI) on a conventional loan.
“You may also be able to save the $300 to $400 it typically costs for an appraisal, as many lenders offer appraisal waivers when you make a down payment of at least 10%,” Ceizyk says.
5. Opt for a more affordable home or rent out part of your property
Starting small and just getting your foot in the door with a less expensive home is a smart strategy in today’s market, says Chiongian.
“Whether you choose a starter home or a fixer-upper, there’s always the opportunity to roll over and upgrade your investment into something more significant,” she says. “Alternatively, you can select a larger property and rent out part of your home to help pay your mortgage.”
6. Qualify for a different loan product
You may be able to get a lower interest rate — and make little to no down payment — by qualifying for the right loan type. Conforming, FHA, VA, and USDA loans can all offer great deals, but you need to find the loan product that best matches your profile.
For instance, FHA loans are usually cheaper if you have fair or poor credit while conforming loan rates are lower with great credit. A VA loan is only available to qualified active-duty military members, veterans, or surviving spouses. And USDA loans are only applicable for properties in designated rural areas.
“If you don’t mind tackling homeownership and landlord responsibilities at the same time, FHA loans allow you to purchase a two- to four-unit home with just 3.5% down, and you can use the rents to help you qualify. But you have to live in one of the units for at least 12 months as your primary residence,” says Ceizyk. Similar rules apply for VA and USDA loans, while conforming loans are more flexible about residency requirements.
7. Make lenders compete for your business
Shopping around among different lenders and loan products is a wise tactic that can produce a better financing deal.
“Since rates have risen, the number of people buying and refinancing has dropped sharply. So lenders are eager for business and more likely to compete for your loan.”
“Try to get quotes from at least three to four lenders, including banks, savings and loan institutions, credit unions, online lenders, and even portfolio lenders. Compare their offers to see who provides the best rates and terms,” Chiongian suggests.
Keep in mind that since rates have risen, the number of people buying and refinancing has dropped sharply. So lenders are eager for business and more likely to compete for your loan. Use this to your advantage by negotiating for a lower interest rate and/or lower closing costs.
8. Work with a mortgage broker
You may be able to secure a more favorable interest rate if you work directly with a mortgage broker rather than a bank or lender.
“A mortgage broker can place borrowers into the best program that fits an individual’s financing needs,” says Realtor Bill Gassett, founder of Maximum Real Estate Exposure.
“For instance,” he adds, “if you want a 30-year fixed rate with no points, instead of walking into a local bank and settling for what they are offering, a mortgage broker can place you with a partnering lender who has a better deal. Mortgage brokers often get their loans at wholesale pricing and pass much of the savings onto the borrower for a real win-win.”
9. Improve your credit
Often, the best way to secure the lowest mortgage rate is to ensure that you qualify for it.
“This can be accomplished by checking your three free credit reports and making sure no errors exist, and by paying down credit cards or other debt,” Gelios advises. “Any way an applicant can reduce the risk to a lender will allow them to offer the best option available.”
Should you be worried about rising rates as a homebuyer?
HIgher mortgage rates can lead to higher monthly payments and more total interest paid over the life of your loan. However, that doesn’t mean it’s time to panic or rush prematurely into any choice.
“Buying a house is a big decision. My advice is not to worry about trying to perfectly time the market or interest rate, which often leads to regret,” says Greg Wilson, a chartered financial analyst in St. Louis. “When the time is right for you to purchase a home, purchase a home. Don’t let headlines or peer pressure influence that. Instead, pull the trigger when you can afford the payments, regardless of interest rate and house price.”
“Buying a house is a big decision. My advice is not to worry about trying to perfectly time the market or interest rate, which often leads to regret”
–Greg Wilson, Chartered financial analyst
Jason Gelios, a Realtor in Southeast Michigan, agrees.
“I always tell people that the best time to buy a home is when it’s best for them. While we are seeing an increase in mortgage rates, with plans of more increases throughout 2022, potential home purchasers should look at their financial situation to see if it makes sense for them to purchase a property sooner than later,” he says. “The interest rate shouldn’t be your only determining factor.”
Lock an interest rate soon, if you can
That being said, you may want to consider locking in a rate sooner versus later, especially considering that rates are anticipated to rise higher throughout the rest of the year.
“Prospective homeowners should feel a sense of urgency to buy now with rising rates, higher inflation, greater costs of goods, and higher rents expected,” explains Ralph DiBugnara, president of Home Qualified. “We have entered an economic environment where all costs are up currently, including interest rates. Although rates are higher today, by locking in a rate now a buyer can secure value for years to come.”
That’s because buying a home typically offers a better return on your money than renting. Consider that rents have risen as much as 30% over the last 18 months, per DiBugnara.
“If you purchase a home and lock in a fixed rate, that mortgage payment will remain the same over the life of your loan, unlike rent payments that continue to go higher year after year,” he adds.
Today’s mortgage rates in perspective
Consider that, back in late 1981, mortgage rates hit an all-time high of 18.63 percent. Today’s rates around 5% pale in comparison.
“Even though rates nowadays are much higher than they were last year at this time, they are still far below historical average interest rates,” says DiBugnara. “I believe we will see rates stabilize around these levels over the next couple of months, and this will be our reality for some time. The good news is that money is still cheap to borrow, and long-term the fixed cost of financing a home will provide saved dollars compared to rising rates and costs.”
Wilson agrees with that sentiment.
“In the year 2000, I was a mortgage broker. Back then, clients were excited that we could refinance their 10% to 12% interest rates down to as low as 7%,” says Wilson. “Mortgage rates may seem high right now, but they are actually priced lower than the rate of inflation.”
Your next steps
Rising interest rates aren’t good news for home buyers. But unfortunately, today’s higher rates likely aren’t going anywhere. So rather than giving up, borrowers need to adapt their strategies to the new interest rate market.
Luckily, there’s plenty you can do to fight the market and lower your rate. Keep your finances in order, know your loan options, and don’t be afraid to compare lenders and make them compete for your business.
Lowering your rate by even just a fraction of a percent can lead to huge savings. So any additional work you put in to find a lower rate should be well worth the effort.