If you were hoping mortgage rates would go back to 2016 lows anytime soon, you’re probably out of luck. As the American economy improves, the Federal Interest rate will continue to rise, and so will mortgage rates. As you can expect from these trends, applications for mortgages have decreased. According to the Mortgage Bankers Association, applications fell by 5%—coincidentally, the average rate for a 30-year fixed rate mortgage recently rose above 5% for the first time in years.
Unfortunately, you will be waiting a long time if you hope to get a rate in the mid-4s when you buy a home. Rates will continue to rise, so a better strategy is to find ways to beat the current rates.
Here are four ways how you can get into a home with a rate lower than 5%.
1. Buy Discount Points
Lenders give you an opportunity to lower your interest rate by buying “discount points.” One point is worth .25% off your interest rate, and each costs 1% of your total loan amount.
Say you are borrowing $250,000 at a rate of 5%. You decide to buy one discount point, for $2,500. This will lower your interest rate to 4.75%.
Now we understand that the cost of a discount point seems like a lot, especially if you are already paying for a big down payment. In many cases, a single discount point will cost more than your monthly mortgage payment. You’ll want to do the math and calculate how long you’ll need to live in the home in order for the discount point(s) to pay off. A simple rule-of-thumb: The longer you live in the home, the more you’ll save from discount points. If this is just a “starter home,” be careful. If you plan on living out the life of the mortgage…you stand to save thousands.
2. Get an ARM
An “ARM” is an adjustable rate mortgage, and it provides the opposite approach as discount points. Points will pay off for those looking to stay in a home, but ARMs are a better option for those looking to stay in a home for a short period of time.
The interest rate on an ARM changes depending on the current market rate, so what is low today could be high next year, and vice-versa. However, they also start with an opening fixed period. For example, a 5/1 ARM will be fixed for five years. This five-year period will actually be at a lower rate than the current market offering for a fixed-rate mortgage. Remember, the total you’ll pay may increase dramatically when the market rate kicks in, so consider how long you plan on staying in the home, and whether an ARM will ultimately result in long-term savings.
3. Get A Shorter Term
The less time you take to pay off your mortgage, the less you’ll pay in interest. As an added benefit, lenders will also give you a lower rate if the term of your mortgage is shorter than 30 years.
Keep in mind that a shorter term will mean much higher monthly mortgage payments. If this isn’t possible for you today, you can consider refinancing your mortgage in 5 to 10 years. There’s a chance rates will have gone down again, and even if they don’t, you can alter the remaining term of your mortgage. Ultimately you’ll save on your interest payments, even if you need to wait a few years.
4. Pay Back Extra Principle
Mortgages are amortized so that you’ll be paying the same amount every month over the life of the loan, based on the theoretical interest you’ll accrue. Many are surprised they begin loans by paying almost nothing but interest at the beginning of a mortgage, and very little principle.
However, any additional money you pay on top of your required monthly payment will automatically go to the principle of mortgage. This speeds up how quickly you pay off your principle, which in turn reduces the total interest you’ll pay over the years. Be wise when doing this; you’re much better off paying interest over 30 years than going into foreclosure because you were too aggressive in paying principle!
Need help finding a way to beat interest rates? Make sure to speak to a lender who can help you find the best plan for your financial plans.