Currently, 30-year, fixed-rate mortgage rates are above 6%, up from 2.6% at the beginning of 2021. The cost of buying a home was already high, but now it has become even more difficult.
The Fed has been clear that it will take the necessary steps to cool inflation, which could mean more rate hikes on the horizon and no relief in sight for buyers.
So, what can you do to beat high interest rates on mortgages?
The following strategies could help you get a lower rate on a new home in Berks County if you’re planning to buy.
If you pay for discount points upfront, you will be able to lower your mortgage interest rate. A discount point costs 1% of your loan amount. Suppose you are borrowing $300,000, and one discount point costs you $3,000. You would save 25 basis points, or 0.25%.
You can typically buy your rate down by 0.25% for each discount point. You may save more or less depending on your lending company, since lenders set their own pricing.
You need to calculate to see if buying points will work for you. To do this, divide the buydown cost by your monthly savings, which will let you calculate your point of breaking even.
If you’re paying $3,000 for a discount point and save $100 a month on your payment, then your breakeven point would be 30 months. To get back your buydown cost, you have to stay in your home for at least that long.
Think About An Adjustable-Rate Mortgage
Some buyers may consider an adjustable-rate mortgage (ARM) when interest rates spike like they are now.
The initial interest rate on ARMs is usually fixed for a certain period of time, usually three to ten years after the loan is made. It is called a teaser rate, and it is usually lower than the rate charged on a fixed-rate mortgage.
Once your fixed-rate period ends, the downside is that your rate can be adjusted, which can mean you have a higher rate and monthly payment in the future.
If you stay in your home for a shorter period of time, then an ARM can make sense. There are also lifetime and yearly limits on how much your payment can go up over time.
Make a Bigger Down Payment
Making a larger down payment will make you seem like a less risky borrower, which will result in a lower interest rate. Increasing your down payment will also lower your monthly payment, and if you pay at least 20%, you won't have to pay private mortgage insurance.
Compare Loan Products
You might get a lower interest rate while making little to no down payment if you compare the types of loans you can qualify for, like a VA, FHA, conforming, or USDA loan. FHA loans are cheaper if you have fair to poor credit, but conforming loan rates will usually have lower rates if you have excellent credit.
Get a Shorter-Term Loan
Instead of 30 years, lenders offer 15- or 20-year mortgage loans. In general, 15-year loans offer lower interest rates than 30-year loans by 0.5-0.75%.
With a shorter-term loan, you will also build equity faster and pay less interest.
A shorter-term loan has the disadvantage of higher payments.
Work with a Broker
Working with a mortgage broker instead of a lender or bank might also help you beat high interest rates. Mortgage brokers can help you find the best program for your needs. Frequently mortgage brokers will also get their loans at wholesale prices, and you can gain the advantage of some of those savings as a borrower.
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