Mortgage rates are likely to remain in the 6% range through the end of the year and could fall further in 2025 given recent rate cuts by the Federal Reserve. However, waiting for mortgage rates to drop significantly before purchasing a home may not be an option for you.
To buy a home at current interest rates, you need to understand the types of mortgage loans and get your finances in order. That means a clean credit report, a good credit score, money in the bank, and manageable debt.
Here are five strategies to help you get the lowest mortgage rate on your next mortgage.
Read more: When will mortgage rates fall?
Nearly half (45%) of homebuyers who took out conventional loans in 2022 purchased discount points to lower their interest rates, according to a Zillow study. Prepaying interest to lower your current mortgage rate is called buying discount points, and it becomes popular during times of high interest rates.
Purchasing 1 point equals 1% of the loan amount and typically reduces your interest rate by one-quarter of a percentage point. Any number of points can be purchased, and fractions can also be applied.
However, it's a good idea to calculate the initial cost of purchasing points and compare it to long-term interest rate discounts. Other factors to consider in this calculation include how long you plan to live in the home and your down payment.
Lenders may add one or two points to their mortgage offer to make the interest rate they're offered seem more attractive. However, keep in mind that you are actually paying a discounted rate with the upfront rate.
Tip: When considering a loan, compare loan offers with zero points. You can then decide later whether to purchase points to lower your interest rate.
Let's take a closer look: What are mortgage discount points and should you pay them?
Borrowers can lower their interest rate during the first few years of their loan term with mortgage rate buydowns. Home builders, sellers, and some lenders may offer interest rate buybacks to increase sales. However, this is a rare option among mortgage lenders. In the year ending June 2023, just over a dozen nonbank lenders accounted for the bulk of its acquisitions (80%), according to Freddie Mac.
National mortgage lenders with buyout programs include:
As an example, an acquisition could reduce interest rates from 6.5% to 6% for two years. If the company proposing the acquisition isn't compensating it with fees, it could be a good deal.
Although your interest rate will be lower in the short term, your actual payments and total interest may be higher in the long term. Strategies to lower interest rates must calculate long-term benefits.
Tip: If you're interested in a buyout, compare home loans both with and without a buyout. Lenders will qualify you based on a permanent interest rate, not a temporary purchase rate. Finally, be prepared for higher monthly payments at the end of the acquisition discount period.
Details: How to buy out your mortgage interest rate
Adjustable rate mortgages, a mortgage product that grows in popularity whenever interest rates start to rise, are back.
ARMs have a fixed interest rate for an introductory period (often 5 to 10 years), but then the interest rate changes periodically, usually once or twice a year. Tips when buying ARM:
Look for a lower introductory interest rate than a fixed-rate mortgage.
Choose the term you feel comfortable with, perhaps depending on how long you plan to stay in the home.
Plan your budget to account for the potential increase in your monthly payments if interest rates rise after your fixed rate introductory period ends.
Read more: Variable rate vs. fixed rate mortgages
Are you looking for an interest rate that will never change and help you build home equity faster? Consider a short-term loan. As opposed to traditional 30-year terms, 15-year fixed term mortgages typically have lower interest rates. However, because the term is shorter, homebuyers tend to have higher monthly payments.
More information: 15-year vs. 30-year mortgages — how to decide which is better
A home loan allows you to take over the remaining payments on your existing mortgage. Perhaps a lump sum payment will be made to the current owner to cover the value of the stock or to make a profit. To do this, you will need to have the necessary cash on hand or, in some cases, take out a loan.
While it may be tempting to take advantage of low interest rate underwriting loans, most conventional mortgages are not eligible. This means you need to find a seller with an FHA, VA, or USDA loan.
Read more: Which is more important: interest rates or home prices?
Mortgage interest rates are above 6%, and many homeowners are stuck with low interest rates caught in the middle of the COVID-19 pandemic, making mortgages difficult at the moment. Refinancing is not an option for some homeowners.
However, home ownership is a long-term endeavor, and mortgage interest rates are highly cyclical. Just because mortgage rates are above historic lows doesn't mean refinancing opportunities don't exist.
After its November meeting, the Fed announced it would lower interest rates and expects them to continue lowering rates for the remainder of 2024 and into 2025.
Please pay attention to the interest rate after moving in. Before refinancing, make sure you get about 1% to 2% lower than your current mortgage rate. Also, keep in mind that there are closing costs for refinancing. You'll need to decide whether your goal is to lower your monthly payments or pay off your home faster.
Let's take a closer look: What determines mortgage interest rates?
The lowest ever mortgage rate for a 30-year loan was 2.65% in January 2021, according to Freddie Mac.
It's unlikely, but unlikely, that mortgage rates will return to 3%. It would take another dramatic event (like the coronavirus pandemic) for interest rates to fall this low.
VA loans typically have the lowest mortgage rates, especially 15-year VA loans because short-term terms have lower interest rates than long-term ones.
