The year of 2022 has become the year of fast-rising mortgage rates after several years of historically low-interest rates. That is not good news for home buyers that have also been battling a seller’s market at the same time. However, there are a few things that home buyers can do to fight back against rising interest rates now that the market is shifting away from being a seller’s market towards being a balanced market for both sellers and buyers.
Since the start of 2022, mortgage rates have more than doubled, from less than 3% to nearly 7%...
If you are a first-time buyer, you might be looking for a home at the lower end of the market — maybe with a $325,000 purchase price. But let’s take a look at something towards the middle or slightly upper end of the marker… yes, $600,000 has become slightly upper end. You have good credit but not perfect credit. Early in 2022, you could have bought a $600,000 home with a 10% down payment and at a 4% interest rate. Back in March, your monthly P&I payment would have been close to $2,535. As interest rates for good credit borrowers reached 7% in October, that payment would now be $3,535 — a monthly increase of $1,000.
1. Buy down your interest rate with points. It costs money to save money but one of your best options might be to pay down your interest rate. Generally, each discount point costs 1% of your loan amount. So, if you are seeking to borrow $590,000, one discount point would cost you $5,900 and would typically lower your rate by 25 basis points (0.25%). But before you do this, do the math because lowering your interest rate to 6.75 will still mean a monthly P&I payment of $3,502 — a measly savings of $33 each month. It will take almost 15 years before you break even on this deal.
2. Consider an adjustable-rate mortgage. Adjustable rates mortgages always become popular when interest rates are rising because it gets you into a new house with lower initial payments — but beware of what might happen in the not-distant future. A 5-year ARM might get you a 6% loan today. Your monthly payment would be about $3,370, a monthly savings of $165. But that interest rate could go up as much as 2% in as little as 6 months. That would mean that 6 months from now your payment could jump to $4,250. That’s a lot of risk for very little near-term reward.
3. Go with a shorter-term loan. Lenders also consider their risks. The more years they loan you money, the bigger their risk. If you shorten the length of your loan, lenders will give you a lower interest rate. Today, you might be able to get a 6.4% interest rate on a 15-year mortgage. Your monthly payment would be higher at $4,675 but you would pay off the loan in half the time and save a ton of money by doing it this way.
4. Make a larger down payment. This can become a point of negotiation with your lender because you become a less risky borrower when you have more skin in the game. If you can bump up your down payment from 10% to 20%, several good things can happen for you. You’ll probably get a better interest rate. You won’t have to pay Private Mortgage Insurance. And you might even be able to get the lender to waive the appraisal.
5. Consider all your loan options. You may be able to get a lower interest rate — and make little to no down payment by qualifying for a loan type that meets your particular needs. Conforming, FHA, VA, and USDA loans can all offer great deals, but you need to find the loan type that best matches your needs. Shop around rather than take the first loan offer for which you are approved.
6. Mortgage loans are a competitive business. Shopping around among different lenders and loan types can find the best deal for your needs. 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.
7. Improve your credit. When you hear that interest rates are approaching 7%, those are only for the most qualified borrowers. With sky-high purchase prices and high-interest rates, the most important thing you can do is have good credit. Today, lenders are competing for business. They will give the best interest rates to the most qualified borrowers.
8. Work with a mortgage broker. Make the competitive lending market work in your favor. You may be able to secure a more favorable interest rate if you work with a mortgage broker rather than individual banks and lenders. A mortgage broker can place borrowers into the best program that fits an individual’s financing needs.
What suggestions can you add about obtaining the best interest rate available? Please leave your comment.