It’s tough for homebuyers. Mortgage rates play a key role in calculating your monthly payment and have been notably high lately.
For the most popular type of mortgage, the 30-year fixed loan, the Average rate is around 7.44%, up from 2.72% in November 2020.
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If you bought a $500,000 home three years ago with 20% down, your total monthly payment would have been about $2,300. The same home at the current price would cost at least $1,000 more each month. And considering the increase house pricesYou would probably pay more and sacrifice aspects such as space or location.
There are a number of well-known strategies buyers should try to get a lower rate, including comparing offers from different lenders, putting down more than 20% of the purchase price, and improving their credit scores.
However, these tactics cannot achieve much. Here are two advanced strategies to consider to lower your mortgage rate.
Consider an adjustable rate mortgage
An adjustable rate mortgage, or ARM, isn’t for everyone, but it might be ideal for someone who plans to move again within five to seven years.
ARMs work like this: Instead of getting a fixed mortgage rate for 30 or 15 years, you get a fixed rate that lasts a set number of years. When that window closes, your rate may go up or down based on current market rates. Common ARM types include 5/1 and 7/1, which means your initial rate is set for five or seven years, respectively, and then changes annually.
Introductory rates on ARM mortgages are typically lower than rates on 30-year fixed-rate mortgages because the buyer assumes the risk of future interest rates. He doesn’t know what he might be paying in the future, so the lender offers him a break with a lower introductory rate.
The spread between ARM and fixed loan rates can be as high as 1%. As of Nov. 22, the national average 5/1 ARM rate was 6.85%, compared to the national average 30-year fixed rate of 7.75%, according to Bankrate. (Remember: These are averages. With excellent credit and/or a large down payment, you could get a rate below these figures.)
If you’re already stretching your budget to buy a home, an ARM might be too risky. While your initial monthly payment may be affordable, it could skyrocket by hundreds of dollars if interest rates rise in the future.
That’s where being a shopper on the go can come in handy. If you plan to relocate or change before your initial rate period ends, you can avoid a potentially unpleasant rate adjustment.
That said, experts predict that interest rates will begin to fall in 2024. If you can wait until next year to buy a home, you may start to see 30-year loans with more acceptable monthly payments, a safer option if you’re looking for loans. long-term. stability.
Buy mortgage points
Whether you opt for an ARM or fixed-rate loan, purchasing mortgage points can be a smart way to lower your rate if you have extra money available. Basically, you’re buying a long-term discount on your interest rate (for an ARM, it’s just the initial rate).
Here’s how it works: Each “point” you purchase reduces your rate, usually by 0.25%, but some lenders offer smaller increases. Each point costs about 1% of the loan amount.
Many lenders will limit the number of points you can purchase, but let’s say you’re taking out a $300,000 fixed-rate mortgage and trying to reduce your rate from 7.5% to 6.5%.
You will need to purchase four points at a cost of $3000 each. That’s an additional $12,000 due at closing to save about $200 a month. It will pay off even if you stay in the house for at least five years (divide the monthly savings by the initial cost). It’s a decent deal if you can manage the initial expense.
Pro tip: Look for motivated sellers or lenders offering rate reductions. Better yet, consider purchasing new construction. In October, nearly 30% of homebuilders offered mortgage rate reductions, according to the National Association of Home Builders. The only thing better than buying something at a discount is having someone else buy it for you.
