According to Freddie Mac<\/a>, the current average interest rate on a 30-year fixed-rate mortgage is 6.57%, after topping at 7.08% on November 10th. Despite dropping a bit since the end of 2022, mortgage interest rates continue to impact prospective buyers looking to purchase a home. This article will discuss five main ways homebuyers can lower their borrowing costs, as even a slight reduction in interest payments can save copious amounts of money in the long run. <\/p>\n Interest rates peaked at the end of 2022 and slightly decreased throughout 2023. While some buyers returned to the market to purchase property, others may still wonder if interest rates will continue to decrease, creating a more appealing market. However, there is no strong evidence to suggest that rates will return to the low levels of 2021 and early 2022. <\/p>\n Jerome Powell, Chair of the Board of Governors of the Federal Reserve, and the Fed, raised<\/a> the benchmark interest rate at the start of May 2023. While the Committee hopes to bring inflation down to a steady 2%, raising interest rates continues to impact mortgage interest rates. Until the Fed delays its rate hikes, mortgage interest rates cannot significantly decrease.<\/p>\n The Fed may not continue to raise interest rates throughout 2023. Mortgage interest rates may not quickly decrease, but prospective homebuyers can expect rates to remain steady for the remainder of the year. Rates should not increase at the rates they did throughout the summer of 2022. <\/p>\n Depending on where you\u2019re looking to purchase a home this year, you may consider adapting the type of mortgage you select. Some housing markets, like \u201cZoomtowns,\u201d witnessed drastic growth in light of COVID-19 but have since dropped their asking prices. Buyers may therefore use a fixed-rate mortgage to secure a current interest rate and ensure they can purchase with a lower asking price. <\/p>\n Additionally, those looking to purchase in competitive and more expensive markets, like Miami<\/a> or New York City<\/a>, may consider an adjustable-rate mortgage (ARM<\/a>) to acquire an initial lower interest rate, then refinance<\/a> in the future before their rates increase. <\/p>\n Making a more significant down payment isn\u2019t always realistic, but putting down more than the traditional 20% is one of the best ways homebuyers can reduce borrowing costs. Buyers should only consider this option if they have the financial resources to do so safely, as tapping into their financial reserves can cause more harm down the line. However, a larger down payment leaves the lender with less risk, meaning they usually feel more comfortable offering a lower interest rate. <\/p>\n Additionally, initially paying off a higher portion of the purchase price means homebuyers receive a lower monthly mortgage payment. They can therefore spend more of their funds on other homeownership costs or put a larger amount toward their mortgage payments and pay off the loan in a faster timeline. <\/p>\n Homebuyers who can\u2019t meet the 20% down threshold may have to buy private mortgage insurance (PMI<\/a>). Mortgage insurance protects the lender, who takes on additional risk by providing a loan with a lower down payment. While you might be able to secure a slightly lower interest rate by purchasing mortgage insurance, the insurance cost will likely negate the lower interest payment, leading to higher borrowing costs.<\/p>\n Learn more:<\/b> What Is Loan to Value Ratio<\/a><\/em><\/p>\n Choosing a shorter loan term<\/a> is arguably the best way to reduce mortgage interest rates. Shorter-term mortgages typically have lower interest rates because of reduced risk to lenders, as they are likely to receive their money faster than with a 30-year mortgage. Freddie Mac\u2019s most recent numbers show that the average interest on a 30-year fixed-rate mortgage is 6.57%, but the average interest on a 15-year fixed-rate loan is 5.97%. Someone who acquires a loan with a 5-year term can expect an even lower interest rate. <\/p>\n Since homeowners pay off a loan with a shorter interest rate sooner than they would on a 30-year term, monthly payments will be higher. Therefore, only borrowers with enough income or money in their savings can get approved for a shorter-term loan. Homebuyers can acquire a mortgage with a 20, 15, or even 5-year term. Their loan term length depends on how much they can afford to pay<\/a> each month.<\/p>\n Borrowers should plan to spend a higher amount of their monthly income toward their mortgage and understand that they may not be able to allocate as many funds to other costs of homeownership. Therefore, they should only decide to move forward with a shorter loan term if they are confident they can afford the monthly payments and still have savings for repairs and maintenance. <\/p>\n A poor credit score<\/a> will increase a borrower\u2019s interest rate. Consumers can typically raise their credit score within months<\/a> and request a rescore from their lender to update their credit score quickly and then present that new score to the lender. <\/p>\n Generally, a homebuyer will know several months ahead if they want to purchase a property. Therefore, they can use that time to work on their credit score by repaying outstanding debt, disputing any errors, apply for any additional credit cards which help build credit. A higher credit score will help secure a lower interest rate on a loan and prove to lenders that you have a history of paying back your debt promptly. <\/p>\n Prospective homebuyers who don\u2019t have enough credit to qualify for a mortgage or a satisfactory interest rate can consider the growing rent-to-own<\/a> market. They may also consider an ARM with a fluctuating interest rate. While generally more risky, ARMs have lower qualifications and can appeal to borrowers who do not qualify for a fixed-rate mortgage. <\/p>\n Those with a high credit score can also ask lenders for a lower interest rate. Since banks want to work with homebuyers who have higher credit scores, homebuyers can use this to their advantage and showcase that their score makes them strong customers. Sometimes, lenders might lower their rate if borrowers can prove they\u2019re a competitive applicant. <\/p>\n A borrower can purchase mortgage points from a lender for a lower interest rate. Points typically cost 1 percent of the mortgage amount \u2014 one point on a $500,000 loan would be $5,000, for example. Each point lowers the mortgage interest rate by 0.25 percent for the loan’s lifetime. A real estate agent<\/a> or a financial professional could help you decide if this option is right for you, as it does require investing more money upfront, and borrowers need to decide if that initial investment pays off financially. <\/p>\n Homebuyers can purchase multiple mortgage points and half points and must provide the funds at closing. Buying mortgage points is an effective way to prepay part of the mortgage and lower the money you will spend over the loan term. <\/p>\n Before closing on a mortgage, homebuyers should compare rates from various banks and lenders. Multiple offers allow borrowers to choose the best terms and lowest interest rates. Consider reaching out to banks or credit unions you have worked with in the past, as they may reward your loyalty with a lower rate. Homebuyers can consult a mortgage broker to find rates from multiple lenders. If a potential borrower wants to work with a specific lender, they can acquire lower price quotes from various lenders and try to present that number to their preferred lender. There is a chance that lenders could price-match to ensure they get the customer. <\/p>\n The easiest way to get an initial estimated interest rate on your mortgage is by checking current mortgage and refinance rates<\/a>.<\/p>\nWill Interest Rates Decrease in 2023? <\/h2>\n
Different Markets, Different Interest Rate Strategies <\/h3>\n
1. Make a Bigger Down Payment<\/h2>\n
\n
2. Choose a Shorter Loan Term <\/h2>\n
3. Improve Your Credit Score<\/h2>\n
4. Buy Down the Interest With Mortgage Points<\/h2>\n
5. Shop Around for the Best Rate<\/h2>\n