Homebuyers

5 Ways to Lock In a Lower Mortgage Rate

High mortgage rates don’t have to derail your homebuying plans.

Those looking to save money on their mortgage (and who isn’t trying to save some cash these days?) will discover there are ways you may be able to lock in a lower rate.

You just have to get a little creative.

Below are five ways you may be able to get a lower mortgage rate through strategies like rate buydowns, shorter-term mortgages, and adjustable-rate loans.

1. Look for builder rate buydowns for new construction

To encourage buyers to consider newly constructed homes, many builders are offering full-term mortgage rate buydowns.

This means that some builders will help you get a rate notably lower (sometimes by more than one percentage point) than the current average market mortgage rates by “buying it down.”

In this scenario, the builder purchases “discount points” that lower the buyer’s interest mortgage rate.

Buying down a buyer’s rate can cost builders tens of thousands of dollars, even ones with their own financing arms. Therefore, some builders will increase the asking price of the home to offset the cost of buying down the rate for the 30-year mortgage.

So, are the interest savings worth the higher cost of the home? It depends.

“Look at both: price and payment with the buydown, and then price and payment without it,” said Amber Ernst, sales manager at New American Funding. She’s based in Bettendorf, Iowa. “The builder should be able to show you both prices so the lender can determine the payments.”

2. Negotiate a seller rate buydown

Builders aren’t the only ones who might offer a rate buydown. Sometimes, a motivated seller (or one who hasn’t received any offers) may agree to pay into a temporary rate buydown as part of the deal—typically for one, two, or three years.

This means for the first few years of your mortgage, you pay a lower rate. On a 2-1 buydown if rates are 6.5%, you would have a 4.5% rate in the first year, a 5.5% rate in the second year, and then the rate would reset to 6.5% for the remainder of the loan.

“Sometimes these are hard to negotiate if you’re competing” against other buyers, Ernst admitted. “But it’s a great way to get a lower payment for a bit.”

In competitive markets, especially if you’re competing with cash buyers, you likely won’t be able to get the seller to agree to a rate buydown.

And even if you do successfully negotiate a seller buydown, there’s often got to be an incentive for the seller. For instance, they may raise the purchase price or make fewer seller concessions.

3. Purchase discount points to lower your mortgage rate

The builder and the seller aren’t the only ones who can buy down a mortgage rate. You as the buyer also have this option upfront.

Buying discount points, also called mortgage points, can save you money in the long run, but it may take several years to reach a breakeven point.

Typically, a quarter point rate reduction costs 1% of your loan. So, if you had a $300,000 loan, it would cost you $3,000 to reduce your loan by 0.25 basis points (0.25%).

That’s why it’s good to have an estimate for how long you plan to stay in your home. This way you can figure out how many years of lower payments (thanks to the lower rate) to recoup what you spent upfront.

Once you’ve reached that point, you’re in the black: All future payments mean you’re saving money every month.

“Work with your lender to see how much it costs and when the breakeven is … to help see if spending it upfront is right for you,” advised Ernst.

Two major caveats to purchasing discount points:

• Buying discount points is ideal only if you anticipate staying in the home well past the breakeven horizon.
• If you have to pull money from high-interest investments to afford the discount points at closing, that may set you back financially more than it helps you.

4. Weigh the pros and cons of a 15-year mortgage

We often think of mortgages as 30-year commitments and for good reason. Roughly 90% of American homebuyers rely on a 30-year fixed-rate loan,  according to Mike Fratantoni, a chief economist at the Mortgage Bankers Association.

But that doesn’t mean a 30-year mortgage is your only option. A 15-year mortgage, for instance, typically comes with a lower interest rate. That means huge savings:

• First, you’ll save because the interest rate is lower.
• Second, you’ll save because you’re only paying interest on your loan balance for 15 years, instead of 30.

The problem? The monthly payments are significantly higher compared to a 30-year loan, since they’re spread across only 180 payments instead of 360.

“Some people can’t squeeze it in,” Ernst acknowledged. “But it’s definitely an option for those who are buying lower than they actually qualify for and are interested in total debt savings.”

5. Consider an adjustable-rate mortgage

Not all mortgages have a fixed rate, which doesn’t change for the duration of the loan. Some homeowners instead finance their homes with an adjustable-rate mortgage (ARM), meaning the rate can vary over time.

Why commit to the unpredictability of an ARM? Because the mortgage starts with a fixed rate for a set number of years (usually 5, 7, or 10) before it fluctuates. And that rate is generally lower than the fixed rate currently offered.

However, after that initial fixed-rate period, the rate can change, for better or worse, depending on market conditions. This means your rate, and thus your monthly payment, could increase with little warning up to a certain cap.

That makes an adjustable-rate mortgage ideal if you know you’ll only be living in the home for a few years before selling and moving again. It could also be good for those who plan to refinance the loan.

But if you plan to make the home your forever home, or at least a place you’ll live for a decade-plus, you may be safer with a fixed-rate mortgage.

Amber Ernst NMLS # 406037