You’ve heard the news – mortgage rates surged from below 3% to as high as 5.5% in the span of a few months.
And they don’t appear to be coming down anytime soon. While that’s up for debate, the trend is clearly NOT your friend when it comes to securing a low interest rate on your home loan.
But that doesn’t mean you just throw the rules out the window and apply with any bank or lender willing to approve your mortgage application.
Nor should you just accept the first lowish interest rate presented to you, as enticing as it might be.
This is actually a great time to be even more aggressive, knowing that mortgage rates continue to trend higher, and competition is fierce.
1. Shop Your Mortgage Rate!
I’ve said it once and I’ll say it again, and again after that. You have to take the time to compare rates and lenders if you want to secure the lowest interest rate on your mortgage.
There are studies that prove this – it’s not just boilerplate advice.
A recent study from Freddie Mac revealed that getting just two quotes as opposed to one could save you thousands.
And it actually gets even better the more you shop. Three quotes saves even more. Sure, it’s no fun, but neither is paying a sky-high mortgage payment.
Don’t complain about the rates not being as low as you heard if you haven’t put in the time to shop.
If you make the effort to track down a coupon code for your simple online purchase, you should take the time to gather multiple mortgage rate quotes. Period.
This is especially true now as lenders may be offering a wider range of rates during this volatile period.
2. Improve Your Credit Scores, Then Apply
Also a cliché in the mortgage industry, but a very real and important tip. It’s no secret that those with higher credit scores gain access to lower interest rates.
Just take a look at this chart above of real-time rate lock data from Optimal Blue (part of Black Knight).
Notice the borrowers with 740+ FICO scores have average rates of 5.211%, while the sub-680 borrowers have average rates of 5.619%.
That’s nearly a half-point higher simply because you haven’t addressed whatever credit issues are holding you back.
So if you’re not doing your absolute best credit score-wise, you’re doing yourself a disservice. Take the time to work on your credit if it’s not where it should be.
Generally, a 760+ FICO score is sufficient to obtain the lowest mortgage rates possible, at least when it comes to your credit score.
3. Come in with a Larger Down Payment
While perhaps not as easy as maintaining excellent credit history, a larger down payment can result in a lower mortgage rate, which will save you money each month for a long, long time.
Not everyone has extra money lying around to do this, but if you do, or you can save more before buying, it can work to your benefit when it comes time to apply for a mortgage.
Those who are able to put down 20% or more can obtain lower interest rates and avoid mortgage insurance at the same time.
It’s actually a triple bonus because you avoid pricing adjustments at the 80% LTV+ threshold, the PMI, and wind up with a lower loan amount.
If refinancing your mortgage, you might be able to execute a cash in refinance and lower your LTV to snag a better interest rate.
4. Pay Some Points
While somewhat counterintuitive, if you pay now you can save later on your mortgage.
What I mean by that is offering to pay discount points at closing.
They’re basically a form of prepaid interest that will lower your interest rate for the life of your loan.
For example, if the 30-year fixed is pricing at 5.125%, but you can pay 1% of the loan amount today for a rate of 4.875%, it could save you a lot more money over the duration of the loan term.
Just be sure it makes sense financially, and that you plan to stay in the home/mortgage long enough to recoup the upfront cost.
If you don’t actually keep the home loan or the house for more than a few years, this could actually cost you.
And with rates so high at the moment, with dare I say a chance to drop in the next 12 months, it might be best to settle for a market rate sans points and hope to refinance to cheaper later.
5. Consider All Loan Programs
Yes, the 30-year fixed is in the 5.25% range now. But no, it’s not the only loan program available to home buyers and those looking to refinance an existing mortgage.
There are lots of different home loan types out there, many with lower interest rates than the 30-year fixed.
For example, the 15-year fixed prices closer to 4.50%, and adjustable-rate mortgages like the 5/1 and 7/1 ARM are also significantly cheaper than fixed-rate products now, around 4% or lower.
They also provide a fixed rate for several years before you have to fret about a rate adjustment.
Consider an ARM if you want to save money, especially if you don’t plan on staying in the property for a long period of time.
Your interest rate may never actually adjust if you don’t keep it past the initial teaser period. And you could save a lot of money during those years.
6. Negotiate Harder
You can negotiate mortgage rates and fees. Maybe not all banks and lenders allow you to do this, but many do.
It’s also possible to compare mortgage brokers and have them compete for your business with their many wholesale lender partners. Someone will come up with better than the next guy/gal.
If you don’t bother attempting to negotiate, you’ll never know what’s possible. If the lender says they can’t budge, move on to one that will.
Never accept the first price you’re shown, like anything else in this world.
It doesn’t hurt to ask for lower, especially when it comes to a mortgage. After all, you could be saving money every month for the next 30 years.
7. Lower Your Max Purchase Price
If you want to save money, you might have to make some concessions. That could mean lowering your max purchase price if you’re in the market to buy a home.
I’ve already noted that it could be wise to lower your maximum price threshold on those Redfin and Zillow apps in anticipation of a bidding war.
And while there’s no clear correlation between home prices and mortgage rates, a higher home price will obviously drive up your monthly housing payment.
Either lower your max bid or negotiate more with the seller, or do both. If you can secure a lower purchase price, you’ll need less mortgage. That lower loan amount will save you money.
It’s important to negotiate on the purchase price AND the mortgage. Don’t concede in any area along the way if you want to save money.
Also negotiate with your own real estate agent! They are on your team, but also need to fight for you.
8. Consider a Second Mortgage
Back in the early 2000s, it was common to take out a first and second mortgage concurrently, with the latter known as a piggyback mortgage.
The purpose was to keep the first mortgage at a loan-to-value (LTV) of 80%, thereby avoiding PMI. This method could also be employed to stay at/below the conforming loan limit.
If your down payment is limited, it could make sense to tack on a second mortgage to save some dough.
The blended rate between first and second mortgage sans PMI and higher pricing adjustments could be just the ticket to savings.
If you’ve been considering a cash out refinance, but don’t want to lose your low fixed rate, a standalone HELOC or fixed-rate second mortgage could help you keep your first mortgage intact.
9. Pay It Back Faster
I dedicated a whole article to this one recently. If mortgage rates are high, it makes sense to pay back the mortgage faster.
If your fixed rate is super low, well, take your time in paying back your loan. Or at least don’t rush it.
It’s simple really – the faster you pay the mortgage, the less interest you pay.
You basically want to pay back a low-rate mortgage as slowly as possible, and a high-rate mortgage as quickly as possible, assuming there aren’t better places for your money.
So if you get stuck with a pesky 5% mortgage rate, which is actually pretty decent historically, you can make extra payments each month to lessen the blow.
You could actually pay enough to offset the higher rate and effectively turn it into a 4% mortgage rate.
10. Let It Ride
Lastly, you could wait things out and/or float your mortgage rate if you’ve already applied. You don’t have to accept today’s rates if you’re not entirely happy with them.
Sure, most folks expect mortgage rates to move higher in the near term, but as I’ve said a few times in the past, we’re often surprised at the time we least expect it.
Just consider the recent pullback after it seemed mortgage rates were headed for 6%. Once the spring home buying season wraps, rates could cool off even more.
Typically when new highs are being tested, there are periods of relief along the way. And vice versa. They may not last very long, but it is possible to experience dips and opportunities.
Of course, this can be a risky game to play. But if we’re talking about a refinance, which is entirely optional, you can bide your time and only strike when the timing is right.
Keep an eye on the market, mortgage rate data, and look out for trends and try to lock your interest rate accordingly.
Bonus: Apply for a Mortgage at the End of the Year
After some research, I discovered that mortgage rates tend to be lowest in fall, especially in the month of December.
This is typically a slower time of the year for mortgage lenders, and when they’re not as busy, they may lower their rates to drum up business.
So you might be able to shave an additional .125% or .25% off your mortgage rate if you apply in the later months of the year. This isn’t always true, but it’s something to consider if you’ve got time or flexibility.
It’s actually beneficial for another reason – other than a potentially lower rate, things should be quieter, meaning you might get a more attentive broker/loan officer and a smoother loan process that could move along quicker.