Though today's rate of 7.27% for a 30-year fixed mortgage is nowhere near the 18% from the 1980s, current rates have been discouraging to potential homebuyers. Options outside of the popular 30-year rate do exist though AND could lower your right NOW.
ADJUSTABLE RATE MORTGAGE (ARM)
ARMs generally offer a lower rate for a fixed period, usually for 3 - 7 years. The rate is then "ADJUSTED" up or down based on market conditions. ARMs are ideal for buyers who are planning to stay in their homes for a shorter period of time or plan to refinance when rates are more favorable. Homeowners need to plan to either sell or refinance before the end of their fixed period if rates are on the rise. Use the savings you gained from the temporary lower rate to get ready to refinance. If rates are expected to drop, they're a great option since your rate will fall at the end of the fixed period without having to pay refinance fees.
SHORTER LOAN TERMS
Shorter loan terms earn lower rates than ARMs or 30-year, fixed rates. For example, today's 30-year, fixed rate of 7.27% would be 6.68% for a 15-year, fixed loan. With a shorter-term loan, the bank will earn less interest since a larger portion of the monthly payment will be applied to the principal of the loan. These loans do result in a larger monthly payment.
BUY DOWN YOUR RATE
Homebuyers can "purchase" a lower rate by paying a percentage of the mortgage balance, usually 1%, in exchange for a lower rate. The discounted rate, generally 0.25%, and the number of points that can be purchased varies by lender. If you expect to keep your home for a longer period of time and have some additional money to buy the points, you'll want to calculate the breakeven point to make sure it's a smart move. Take the total cost of the points and divide by the monthly savings your lower rate gives you to find the month you'll breakeven on the costs. Buyers may be able to negotiate for the seller, lender, or builder to buy down points for them.
COMPARE MORTGAGE LENDERS
Shopping different lenders is worth the effort. Rates and fees can vary from one lender to the next. Some banks offer a rate discount for current customers. Banks also assess credit profiles and risk differently; rates are assigned based on those assessments. A good practice is to get quotes from a variety of lenders. Start with your personal bank, a credit union, and then an online mortgage company. In areas where the quotes are competitive, banks often have some room for adjustment so don't forget to negotiate.
REFINANCE YOUR MORTGAGE
Depending on when you bought your home, you may be able to refinance for a lower rate. The trick is to look at your current mortgage rate and assess if the current market rate would lessen your monthly payment. Keep in mind that there are fees and costs associated with refinancing that can add up to 2% - 5% of the loan value. Paying attention to the breakeven point to see if it makes sense. In the current climate with rates north of 7%, it may not be the right time. But knowing your current numbers will help you prepare for when rates do drop.
IMPROVE YOUR FINANCIALS
Lastly, focus on improving your financial profile to lenders. Mortgage rates are determined by the market but also by the lender's risk when loaning money. Focusing on paying down debt, increasing your income, and boosting your credit scores will lower your risk as a borrower. Tucking money away for a larger down payment will also help.
Source: "What's the best way to get a lower mortgage rate? Experts weigh in"
