Homebuyers

Buying a Home When Interest Rates Are High? How to Do It and Potentially Save Money

While mortgage interest rates have ticked down slightly in recent months, they’re still higher than many hopeful homebuyers would like.

But here’s what many buyers miss: a higher-rate market can work in your favor. With fewer buyers competing, there’s less pressure to overbid. And sellers are often more willing to cut prices and negotiate.

So, before you put your homeownership plans on hold, it’s worth understanding what you can do now to secure an affordable mortgage.

“Qualifying for a mortgage in a high-rate market is less about fighting the rate and more about engineering your financial profile before you ever walk into an underwriting conversation,” said Devin Henry, president of Nomadic Real Estate in Washington, D.C.

The mortgage rate is only one part of the equation, and there are things you can do to lower your costs.

Pay off debt to put yourself in a better financial position

One of the most important things you can do if you’re trying to qualify for a mortgage is pay down your debt. Your debt-to-income ratio, or DTI, is one of the first things a lender looks at. And it carries even more weight when rates are high.

What is a good debt-to-income ratio? Many lenders like to see your DTI below 36%, though the exact threshold depends on the type of loan and your overall file.

If you’re trying to figure out how to calculate your debt-to-income ratio, you need to add up all your monthly payments. These can include auto, student loan, credit card, mortgage or rent, court-ordered, and any other monthly debts. Then divide that amount by your monthly gross income, which is how much you earn before taxes.

“The buyers I’ve seen do this well treat their debt-to-income ratio like a balance sheet, not an afterthought,” said Henry. “Paying down a car loan or student debt in the six months prior to application is not just preparation. It is rate optimization without touching the rate itself.”

That’s because lenders are more likely to offer lower rates to those with higher credit scores and lower amounts of debt. A lower rate may save you money by bringing down your monthly mortgage payments. And paying off debt often has the benefit of boosting your credit score.

To bring your DTI down, focus on paying off the debt with the highest monthly payment, since that tends to move the needle the fastest.

Just be sure to check with your lender before moving money around or paying off accounts mid-application. Timing matters during the mortgage process.

A higher credit score could mean a better mortgage rate

Higher credit scores matter even more in a high-rate environment, because even a small difference can impact which types of mortgage loans you may be able to qualify to receive. And those with better scores often are offered lower interest rates. 

On a large mortgage, lower rates can add up to hundreds of dollars a month, or tens of thousands of dollars over the life of a 30-year loan.

That’s why homebuyers should aim to pay every bill on time, keep their credit balances low, and pull their credit reports early so they have time to catch and dispute any errors.

Equally as important is knowing what not to do. Buying a new car, opening new credit cards, co-signing a loan for someone else, or running up balances in the months before closing are some of the most common and costly mistakes buyers make.

Even a small new monthly payment may make it harder for you to secure a mortgage.  

Consider buying mortgage points

Mortgage points, also known as discount points, let you pay more upfront at closing in exchange for a permanently lower interest rate. Typically, one point costs 1% of your loan amount and lowers your rate by about a quarter of a percentage point.

Whether points on a mortgage are worth it comes down to the math. For example, if your points cost $6,000 and save you $200 a month, you would break even in 30 months.

“Points usually make sense only if the buyer expects to keep the loan longer than the break-even period,” said Matthew Martinez, managing real estate broker of Diamond Real Estate Group in San Francisco, Calif. “They make less sense if the buyer may refinance or sell soon, or if spending the cash would leave them without enough reserves.”

Before you decide, run the numbers on how long you realistically plan to stay in the home. That break-even point is the real test of whether points make sense for you.

Ask your home seller for a mortgage rate buydown

A mortgage rate buydown can lower your interest rate for the first few years of your loan. And in today’s pricey market, some sellers and builders are willing to fund them to get deals done.

With a 2-1 buydown, your rate is two percentage points lower in year one and one point lower in year two, before reverting to your original rate for the rest of the loan. That means if your rate was 6.5% when you took out the loan, it would be 4.5% in the first year, 5.5% in the second, and then 6.5% for the remainder of the loan unless you refinance.

With a 3-2-1 buydown, your rate is three percentage points lower in year one, two points lower in year two, and one point lower in year three, phasing the rate up gradually until it reaches the full rate.

Instead of negotiating purely on price, ask your real estate agent about requesting a seller-paid interest rate buydown as part of your offer.

“Rate buydowns negotiated as seller concessions have made a real comeback in this market,” Henry said. “Buyers who position their offers around that, rather than just price, are closing deals their competition is not.”

One thing to keep in mind when considering a mortgage rate buydown: Make sure you’re comfortable with the full payment price once the buydown expires.

Consider an ARM if you don’t play to stay long-term

An adjustable-rate mortgage, or ARM, typically offers a lower fixed rate for the first five, seven, or 10 years of the loan. Then it adjusts based on current rates.

If you plan to sell, refinance, or move before that adjustment kicks in, an ARM can mean real savings compared to a traditional fixed-rate loan.

ARMs do come with caps that limit how much your rate can increase at the first adjustment, at later adjustments, and over the life of the loan. But those caps don’t eliminate the risk. Before you commit, ask your lender to show you the maximum possible payment you could face, and make sure that number is one you could still live with.

“The best candidate (for an ARM) is someone with a clear exit strategy, strong reserves, and a realistic plan to sell, refinance, or absorb the adjusted payment,” Martinez said.

Don’t let a high mortgage rate keep you on the sidelines

A higher rate doesn’t have to mean homeownership is out of reach.

Tackle your debt, protect your credit, weigh whether points or a buydown make sense for your situation. And make sure any loan you choose fits your actual timeline, not just today's rate.

“In a high-rate environment, the buyers who do best are the ones who think like investors,” Martinez said. “They reduce debt, protect their credit, compare loan options, negotiate seller credits, and make sure the payment works even if rates do not fall.”