In this article
- Consider an ARM That has Low Interest Rates
- 1. Buying Down the Rate Through Points
- 2. Adjustable-Rate Mortgage
- 3. Using A Shorter-Term Loan
- 4. Making a Larger Down Payment
- 5. Choosing a More Affordable House or Renting Out Part of Your Property
- 6. Qualifying for a Different Loan Product
- 7. Making Lenders Compete for Your Business
- 8. Working With a Mortgage Broker
- 9. Improving Your Credit
- Should You Get Worried About the Rising Rates?
- Locking Your Interest Rate if Possible
- What to do Next?
Mortgage rates are rising, but you can get a lower rate. Mortgage interest rates have been on the rise throughout the year. This is not good news for home buyers, but it doesn’t have to be that high. There are ways of fighting the increasing rates and getting a great deal on your mortgage loan.
Below are some great strategies that are going to help you get the best rates for your mortgage loan. The increase in rates doesn’t mean there is nothing you can do to get lower interest rates. The strategies below will go a long way in helping you beat rising interest rates including:
Consider an ARM That has Low Interest Rates
- Buy down the rate with points
- Make a bigger down payment
- Use a shorter loan term
- Choose a different loan product
- Choose a different property
- Work with a mortgage broker
- Make lenders compete
- Improve your credit
Below is more information on each of the above strategies and how they are going to help in lowering your mortgage rate even when the interest rates are high.
1. Buying Down the Rate Through Points
You can reduce your interest rate by paying for discount points, but you have to do it upfront. Each pint is equivalent to a point of the loan amount. If you are looking to borrow $300,000, a discount point is the same as $3,000 and this is going to lower your interest by 0.25% (25 basis points).
The general rule is you can lower the rate by 0.25% for every point you buy. Many mortgage experts advise you to do this but it is a good idea to keep in mind that the lenders are the ones setting the pricing, which means the savings can be less or more, depending on the lender.
If you want to know how many points make sense for you, divide the buy down cost with the monthly savings to reach the breakeven point. If you are going to save $100 per month on your mortgage payments when you pay $3,000 for one discount point, then the breakeven point is going to be 30 months. This means you have to live in that house for that long to recover the buy down cost.
2. Adjustable-Rate Mortgage
When fixed-mortgage rates go up, some choose ARMs or adjustable-rate mortgages. Many lenders out there are offering ARM loans that have rates set for a given period – which is usually the first 3, 5, 7, or 10 years of a 30-year loan. The rates tend to be lower than the current interest rate charged for fixed-rate mortgage loans.
Let us say the current Freddie Mac average interest rate on a 30-year fixed-rate mortgage was 5.10%, and the rate for an ARM for 5/1 is 3.78%. This means that the rate can be more than a percent lower.
The downside is when the initial fixed-rate period of the ARM ends, the rate is going to be adjusted based on the index and margin outlined by the loan terms. This can end up being a higher monthly payment and rate down the line.
ARM is going to make the most sense for people who want to live in the house for a short time and make lower monthly payments because they expect a raise or bonus. There are lifetime or yearly caps that limit how much the payment can increase over time. Before you commit to an ARM, it is important to closely look at the prepayment penalties so you don’t end up being stuck with something that doesn’t let you refinance without paying a fee.
3. Using A Shorter-Term Loan
There are many options being offered when it comes to loan terms, such as 15 or 20 years. When you take out a 15-year mortgage, it is going to have a rate 0.5% to 0.75% lower than a 30-year rate.
Another benefit you can expect to get by choosing a term loan is you end up paying less-interests on the life of the mortgage which means you can build equity in the property faster. You are going to save a lot on interest payments by choosing a shorter-term loan.
You need to remember that you are going to make higher monthly payments on a 15-year loan compared to a 30-year loan. This is because you pay the entire loan in half the time. Go through the numbers and see whether you can comfortably pay the monthly payments on the loan.
There are mortgage calculators online you can use to compare the different options. Or you can get a custom rate quote based on your specific situation. It will give you rate and closing cost options in less than 30 seconds.
4. Making a Larger Down Payment
Making a larger down payment is good because the lender can see you as less risk, which can allow them to offer you a lower rate. When you put down a large down payment, it means you are going to pay less on your monthly payments.
When you make a down payment of at least 20%, you are going to avoid things like private mortgage insurance when applying for a conventional loan. You can easily save about three to four hundred dollars in appraisal costs because some lenders are going to offer an appraisal waiver when the down payment is at least 10%.
5. Choosing a More Affordable House or Renting Out Part of Your Property
In today’s market, it might be a good idea to get your foot in with a less expensive house.
Whether you are choosing a fixer-upper or a starter home there is always a chance of rolling over and upgrading your investment to something more significant. You can choose to buy a large property and then rent out part of it to help you with the mortgage payments.
6. Qualifying for a Different Loan Product
You can get a lower interest rate – and make no or little down payment – when you qualify for the right type of loan. FHA, conforming, USDA, and VA loans can offer great deals, but it is important to choose a product that matches your profile.
For example, conforming loan rates are lower with good credit and FHA loans tend to be cheaper when you have poor or fair credit. A VA is an option for qualified active-duty military members, surviving spouses, or veterans. USDA loans are for those people living in designated rural areas.
FHA loans let you buy two- to four-unit homes with just 3.5% but this is for those people who don’t mind balancing homeownership and landlord responsibilities at the same time. The rent from the property is going to help you qualify. One condition you have to meet is to live in the units for at least 12 months. The property has to be your primary residence during that time. The same rules apply for USDA and VA loans while conforming loans tend to be a little more flexible when it comes to requirements.
7. Making Lenders Compete for Your Business
It is a good idea to shop around and see loan products from different lenders because you will end up with a great deal.
The rates going up has meant fewer people are buying and refinancing their homes. This has made lenders eager for business and can end up competing for yours. You need to get quotes from at least three lenders, including banks, loans and savings institutions, online lenders, credit unions, and even portfolio lenders. Compare the different offers and see which of them gives you the best terms and rates.
Remember that the number of people applying for loans and refinancing has sharply dropped. Lenders are eager for business and can compete to get yours, which can be an advantage for you. You can use it to get a lower rate and better terms.
8. Working With a Mortgage Broker
When you directly work with a mortgage instead of the lender or bank, you are more likely to get a loan with a favorable rate. The broker is going to look at your individual financing needs and help you find the right loan for you.
Let’s say you are looking for a 30-year fixed rate with no points, instead of going to a lender and accepting the options they are offering, you can have someone help you find a lender offering a good deal. A mortgage broker is going to do that for you. Mortgage brokers can help you with great deals because they get their loans at wholesale pricing and those savings are passed to borrowers.
9. Improving Your Credit
The best way of getting the best rates on your loan is to make sure you qualify for it. You can do this by checking your free credit report and checking whether there are any issues or errors. You can also improve it by paying down your debt like credit cards. You are going to get a better deal if you reduce the risk to a lender.
Should You Get Worried About the Rising Rates?
When a loan has a higher rate, it means you have to pay more in monthly payments and you are going to pay a lot in interest over the life of the loan. This doesn’t mean you have to start panicking or making rash decisions.
Buying a home is one of the biggest decisions. The best thing to keep in mind is you shouldn’t try to time the market or interest rates. Doing this can lead to regret. When you feel like it is time for you to buy a home, just do it. You shouldn’t let peer pressure and headlines influence this. The best way to know if you are ready to buy a home is if you can afford it, no matter the house price or interest rate.
Don’t make things complicated for yourself by focusing too much on the house prices and interest rates.
The process of buying a home is not that complicated, provided you feel like it is the right step for you. The interest rates are going up and this is going to happen for the rest of the year. If you are thinking about buying a house, then make sure you see your financial situation and whether it makes sense for you to do it. Do it now if possible so you don’t end up regretting it later. You shouldn’t only look at interest rates when deciding whether to buy a house or not.
Locking Your Interest Rate if Possible
You should do this as soon as possible, don’t delay. It is important to do it sooner rather than later because the rates might go up in the coming months. The interest rate is likely to increase, which means you should lock it when it is lower.
If you are thinking about buying a property, then you need to have a sense of urgency and buy it now with the interest rates going up, higher rents, greater costs of goods, and higher inflation. The current economic environment means the costs keep going up, including interest rates. The interest rates are higher today compared to a couple of months ago, but when you lock the rate now, you are going to secure value for many years to come.
Buying a home is going to give you a better return compared to renting. The rents have increased by as much as 30% over the past year and a half. If you choose a fixed rate when buying a home, the mortgage payment is not going to change over the life of the mortgage, which is different from rent payment which increases with time. Back in 1981, mortgage rates reached a record 18.63 percent. The 5% today seems like a small thing when compared to that.
The rates today are higher compared to the same time last year, but they are still very low compared to historical average interest rates. The rates are going to stabilize over the next couple of months. The good thing is it is cheap to borrow, and a fixed cost of home financing is going to save you a lot of money.
Back in 2000, many people were very happy when they realized they could refinance their 10% to 12% rates and get as low as 7%. Mortgage rates can seem too high at the moment, but they are still lower than the rate of inflation.
What to do Next?
It is not good news for home buyers when the interest rates go up. But the good thing is the rates today are not going to go anywhere. You shouldn’t give up; you need to adapt your strategies to the current market.
The good thing is there are a lot of things that are within your power that can help reduce your rate. Know your loan options, keep your finances in order, compare loan products from different lenders and let them compete. When you lower the rate, even if by a fraction, you make a lot of savings. It is worth it to invest time and effort in the process of lowering your rate.
The best way to get started is to take a look at your custom rate and closing cost options. It takes less than 30 seconds to see exactly what your options are.