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The Federal Reserve recently began raising interest rates to clamp down on inflation. The average 30-year fixed-rate mortgage is now above 5%, the highest it’s been since 2011 and representing a 40% increase in the cost of a mortgage. Understandably, many hopeful homebuyers have become dismayed by these rate increases, which may add several hundred dollars to their monthly payments.
Fortunately, there are ways you can reduce your home loan’s interest rate. Below are some of the most full-proof ways to ensure you pay less on your monthly payments. Not all of them will suit every buyer, so make sure to consider each one carefully. As always, you can schedule a consultation with a professional loan officer if you are unsure of anything.
1. Choose an Adjustable-Rate Mortgage1. Choose an Adjustable-Rate Mortgage
Adjustable-rate mortgages (ARMs) tend to get a bad rap, primarily because of the 2008 financial crisis. Due to this meltdown, many homeowners went into foreclosure because they couldn’t keep up with their adjusting rates. So many people lost their homes that it scared people off from ever considering an ARM in the future. But with interest rates now climbing again, borrowers have been suddenly resurgent applying for ARMs.
The truth is, ARMs are not nearly as scary as they used to be. The sort that caused the 2008 meltdown were poorly underwritten, interest-only, with short teaser periods later adjusted every month. Nowadays, most ARMS are carefully underwritten, can be locked in for 5-10 years, and only adjust annually. You still need to understand what you’ll be agreeing to. They’re certainly not for everyone.
The smart way to approach ARMs is by later refinancing them into a fixed-rate mortgage (or another ARM). Doing this can allow you to take full advantage of the considerably low-interest rates of ARMs. You can do this anytime, and there are no pre-payment penalties.
2. Try Boosting Your Credit Score2. Try Boosting Your Credit Score
Raising your credit score is the most tried and true method to lower your interest rate. While those with a score that is already above 700 might not benefit much from raising it any higher, those below 700 are well-advised to do so. The difference in interest rates between a borrower with a credit score of 700 and another with 650 can be as high as 1%. That may not seem like a lot, but it equals hundreds of dollars in monthly loan payments.
Boosting your credit score will take some time and a bit of strategizing. One thing you can do that will have an immediate impact is check and repair any errors on your credit report. Next, you’ll want to start paying off any debts you have. Taking on new debts can also, counterintuitively, help boost your score. New debts will add to your credit history, an essential component of your credit report. Just make sure you don’t miss any monthly payments.
3. See If You Can Pay for Points3. See If You Can Pay for Points
Another option is to pay for mortgage points that can lower your interest rate. You can do this if you have some cash left over after the transaction or get closing credits from the seller. The math works like this: each point can typically lower your interest rate by 0.25%. One point tends to cost 1% of your mortgage, or $1,000 for every $100,000. So, for a $500,000 mortgage, one point would cost $5,000.
Making this one-time payment can significantly reduce your monthly payments. It tends to work best for those borrowers who know they’ll be staying put for a long time.
4. Try to Increase Your Down Payment4. Try to Increase Your Down Payment
A larger down payment means a lower interest rate. This is because it lowers the lender’s risk level when the borrower owns a more significant stake in the property. Most conventional mortgages require a minimum down payment of 20%. Going above your minimum will reduce your monthly mortgage payments and give you more equity you can borrow against at a later date.
Sellers want to find the offer with the highest chance of closing. Making a larger down payment makes your offer look stronger. In addition, a larger down payment can also boost your chances of getting a winning bid in a multi-offer situation.
5. Consider Refinancing5. Consider Refinancing
Borrowers who can’t get the interest rate they want can always consider refinancing. It depends on the lender, and there may be exceptions, but the good news is that there are no legal limits on how many times you can refinance your mortgage. Typically, you’ll need to wait 6-to-12 months between getting your mortgage and seeking to refinance.
The first step with mortgage refinancing is approaching your existing lender and asking them for a lower rate. Most lenders are eager to keep their good customers and may offer a better rate. You can also ask your lender to lower your rate to match a competitor based on your credit history. If that fails, you can always transfer your loan to another lender. Remember that refinancing costs you 3-6% of the loan’s principal. It could take you a few years to recoup this cost with the savings from your new interest rate, but if you’re planning to stay put for a while, the long-term benefits can be worth it.
Final ThoughtsFinal Thoughts
Apart from the above points, another thing you can do to lower your interest rate is to maintain a consistent and long-tenured work history. Lenders like to see borrowers who have been working at the same place for many years and have a steady/growing income. A secure job makes you look low risk, which can net you a lower interest rate.
Now that you’ve seen how to reduce your interest rate, the next step is to see which method works best for your situation. Go over your finances again while thinking of your long-term plans. When you’re ready, arrange for a consultation with a local lender who can walk you through your options.