Mortgage rates may linger in the 6% range into the beginning of 2025, even with the recent interest rate cuts by the Federal Reserve. However, waiting for mortgage rates to fall significantly before purchasing a home may not be an option for you.
Buying a house when interest rates are currently where they are requires an understanding of the types of mortgages and for your finances to be running in high gear. That means a clean credit report, a good credit score, money in the bank, and manageable debt.
Here are five strategies to get the lowest mortgage rates on your next home loan.
Read more: When will mortgage rates go down?
Well more than half (58.7%) of home buyers in the first three quarters of 2023 purchased discount points to lower their interest, according to HMDA data compiled by the Consumer Financial Protection Bureau. Prepaying interest to lower your ongoing mortgage rate, called buying discount points, gains popularity in times of higher interest rates.
Buying one point is equal to 1% of the loan amount and will generally reduce your interest rate by one-quarter of a percentage point. Any number of points can be purchased, and can be applied in fractional amounts, too.
However, it’s a good idea to calculate the upfront cost of buying points and compare that with the discount you receive on your long-term interest rate. Other factors to consider in this calculation include how long you expect to live in the home and your down payment.
Lenders sometimes add a point or two to a mortgage proposal to make their offered interest rate appear more enticing. But remember, you’re actually paying for the discount with an upfront fee.
Tip: When shopping for a loan, compare loan offers with zero points. Then, you can decide later whether to buy points to lower your interest rate.
Dig deeper: What are mortgage discount points, and should you pay for them?
Borrowers can lower their rate for the first few years of the loan term with a mortgage interest rate buydown. Home builders, sellers, and some lenders sometimes offer an interest rate buydown to boost sales. However, it is a rare option among mortgage lenders. Over a one-year period ending in June 2023, only a dozen nonbank lenders accounted for the vast majority (80%) of buydowns, according to Freddie Mac.
Here are some national mortgage lenders with buydown programs:
As an example, a buydown might lower your interest rate from 6.5% to 6% for two years. It can be a good deal if the company offering the buydown isn’t making it up with fees somewhere else.
While you get a short-term break on the interest rate, your payments and total interest may actually be higher over the long term. Buying down your interest rate is a strategy that requires running the numbers on the long-term benefits.
Tip: If you’re interested in a buydown, compare a mortgage both with and without a buydown. Lenders will qualify you based on the permanent interest rate, not the temporary buydown rate. Finally, be prepared for your monthly payment to rise at the end of the buydown’s discount period.
Learn more: How to buy down your mortgage interest rate
A mortgage product that increases in popularity whenever rates begin to rise is back: the adjustable-rate mortgage.
ARMs have a fixed interest rate for an introductory period, often five to 10 years, and then the rate changes regularly, usually once or twice a year. Tips when shopping for an ARM:
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Look for an introductory rate that is lower than a fixed-rate mortgage.
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Choose a term you feel comfortable with, perhaps in line with how long you plan to stay in the home.
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Make sure you budget for possible increases in your monthly payment if the interest rate moves higher after the end of the introductory fixed-rate period.
Read more: Adjustable-rate vs. fixed-rate mortgage
Are you looking for an interest rate that never changes and allows you to build home equity faster? Consider a shorter-term loan. Mortgages with 15-year fixed terms, as opposed to the traditional 30-year term, typically come with lower interest rates. However, since the term is shorter, monthly payments for home buyers do tend to be higher.
Learn more: 15-year vs. 30-year mortgage — How to decide which is better
An assumable mortgage allows you to take over the remaining payments of an existing home loan. You would likely make a lump sum payment to the current owner to cover the value of any equity or for a profit. That would require you to have the needed cash on hand or perhaps get a loan.
As tempting as it might be to pick up a low-interest-rate assumable loan, most conventional mortgages aren’t eligible. That means you would need to find a seller with an FHA, VA, or USDA loan.
Read more: Which is more important, your interest rate or house price?
With home loan interest rates above 6% and many homeowners holding onto low rates they snagged during the height of the COVID-19 pandemic, refinancing a mortgage is not an option for some homeowners right now.
However, owning a home is a long-term commitment and mortgage rates are very cyclical. Just because mortgage rates are above historic lows doesn’t mean a refinancing opportunity won’t present itself.
Following its December meeting, the Federal Reserve announced that it was lowering interest rates once again by 0.25% and taking a “wait and see” approach to further rate cuts in 2025.
After you move in, keep an eye on interest rates. Look for a dip of about 1% to 2% below your current mortgage rate before refinancing. And remember, there will be refinance closing costs, and you need to decide if your goal is to lower your monthly payment or to pay off your home sooner.
Dig deeper: What determines mortgage rates?
The lowest mortgage rate ever on a 30-year loan was 2.65% in January 2021, according to Freddie Mac.
Never say never — but it’s unlikely that mortgage rates will go back down to 3%. A drastic event (like the COVID-19 pandemic) would have to occur again for rates to drop this low.
VA loans usually have the lowest mortgage rates, especially 15-year VA loans, because shorter terms come with lower rates than longer terms.
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