It’s no secret that mortgage interest rates have doubled over the last year. So, if you find yourself longing for the lower interest rates of the past, you’re certainly not alone. These higher interest rates can significantly impact the cost of homeownership and can make home affordability a challenge for potential homebuyers.
Fortunately, mortgage rates and monthly payments aren’t set in stone. In fact, there are several options that can help reduce your mortgage rate and make homeownership more affordable. Here are five mortgage rate hacks worth considering:
1. Ask the Seller or Builder for Help
Did you know that the seller can buy down your interest rate for you, thereby reducing your overall mortgage cost and monthly payment? Dollar for dollar a seller paid mortgage buy-down will typically lower your monthly payments significantly more than the equivalent amount as a price reduction.
Here’s how the buydown works: The seller agrees to what is called a “concession,” most often as a seller-paid closing cost, that is paid to the lender in exchange for a lower interest rate. The rate reduction can either be temporary or permanent. Which option is best for you will depend on your unique situation.
2. Buy Points to Reduce Your Interest Rate
When you buy points, you are paying an upfront fee to reduce your rate. Each point typically costs about 1% of the total loan amount and can lower your interest rate by between 0.25-0.50%. Keep in mind, buying points will increase the upfront cost of a loan significantly but can save you thousands over the life of the loan. However, it’s certainly worth considering how long you plan to be in the home, as it can take years to recoup the upfront cost.
3. Price Shop Different Lenders
Lenders can have widely different rates and fees, so it is absolutely worth your time to price shop multiple options. As you shop, pay attention to both the quoted interest rate and any associated fees. Some lenders will quote significantly lower interest rates than other competitors to draw you in but charge high upfront fees that actually make the loan more expensive. Local lenders are also worth their weight in gold. They will have a knowledge of your local real estate market, have faster turn-around times that can make you more competitive when submitting an offer, and have a vested personal interest in making sure you close on your dream home. Oh, the horror stories I could tell you about internet and big box lenders.
4. Consider an Adjustable-Rate Mortgage
Adjustable-rate mortgages offer a fixed lower rate over a pre-defined period (usually 5, 7, or 10 years). These types of mortgages can offer about 1% lower rate than the fixed rate mortgage. However, it is important to keep in mind that after a fixed period, the rate can increase. If you are planning on living in your home for only a few years or refinancing your loan at some point, these can be a great option. Otherwise, when the initial term ends, you need to be prepared for a higher payment.
5. Optimize your Credit Score
Your credit score is one of the most significant factors that determine the interest rate that you will receive on a mortgage. The higher your credit score, the lower the rate you will be offered. Therefore, if you want to get a lower interest rate, focus on improving your credit score. Make sure to pay all your bills on time, reduce your credit card balances, and avoid opening new credit accounts.
The truth is, while higher mortgage interest rates can make it more challenging to afford a home, there are ways to get around them. Every person’s situation is unique, so it is worth considering factors like down payment, upfront costs, target home location, and the amount of time you plan to live in the home when deciding the best strategy for you. A great local lender can help you determine which option might be best. If you need a recommendation for incredible Atlanta-area lenders, send me a message and I’m happy to direct you to some pretty incredible people.