Mortgage rates rose rapidly in early 2022, with the 30-year fixed rate rising from an average of 3.22% in January to 5.1% at the end of April. While that’s still relatively low historically — the median rate hit an all-time high of 18.63% in 1981 — it still has a significant impact on monthly housing costs for new home buyers and adjustable-rate mortgage borrowers.
With inflation stubbornly high, it’s unclear when mortgage rates will stop rising. If you’re concerned about rising mortgage rates and how it might affect your ability to buy a home or make monthly payments, here are some steps you can take to help you fix the problem.
10 Ways Future Homebuyers and Current Homeowners Can Save Money
Existing homeowners with fixed-rate mortgages won’t be affected by rising rates unless they plan to refinance the loan or buy a new home. However, if you’re a potential home buyer or have an adjustable-rate mortgage, here are steps you can take to offset rising mortgage rates:
1. Lock your tariffs
After you receive initial loan approval from your lender, you can set your interest rate any time up to five days before closing the loan.
In an economic environment where interest rates are falling or at least volatile, delaying lockdowns can be beneficial. But the sooner you lock in, the better when rates rise and show no signs of stopping. In most cases, lenders allow you to set interest rates for 30 to 60 days without charging you.
2. Pay extra to keep your plan longer
If you’re not ready to buy a home within the next month or two, some lenders may lock you in interest for up to nine months.
If you’re building a new home, you’re probably going to go longer, said Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate Mortgage. “Many lenders can put your new home loan on hold for up to 365 days,” she added.
Remember, sticking with mortgage rates can cost you up to 0.5% of your mortgage balance. So, if you buy a home and finance it at $350,000 of the purchase price, you can pay up to $1,750 in deferred rate lock-in.
It sounds high, but the upfront costs can save you thousands or even tens of thousands of dollars over the life of the loan.
3. Consider buying rebate points
A rebate point is a type of prepaid interest that you can pay up front to reduce the interest rate on your loan. Spending 1% of the loan amount per point typically reduces your interest rate by 0.25 percentage points.
For example, if you qualify for a $350,000 mortgage at 5.5%, you can pay two cents on $7,000 to bring your interest rate down to 5%. This will reduce your monthly payment by more than $100.
It’s a high upfront cost, but if you plan to stay at home for a long time and don’t expect interest rates to drop anytime soon, you may end up saving money. Consider using a mortgage payment calculator to see how long it will take to recover the upfront costs from the monthly savings.
“This is really a case in point,” said Tim Pascarrera, president of Ross Mortgage Corporation. “The bottom line is how much are you paying up front, how much will it save you, and how long are you going to take out the loan?”
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4. Save more money
Lenders use prepayments as a risk mitigation tool. A larger down payment means you’ll have less credit to borrow and your monthly payments will be lower, both of which make you less likely to default on your payments.
If you get a traditional loan and you can afford it, you should pay off at least 20% to avoid personal mortgage insurance. PMI’s premium can cost you 0.5% to 1% of your loan amount each year, so eliminating this premium can significantly reduce your costs.
Even if you can’t pay back that much, the bigger your down payment, the better your chances of getting a lower interest rate.
“If you pay 20 percent or more, you’re lining up to get the best deal,” Pascarella said. “However, it’s important to remember that interest rates are still historically low. It may be worth pocketing 10 per cent of the transaction amount to get a slightly higher rate, but it depends on each buyer’s personal financial situation.”
5. Consider an ARM
Adjustable-rate mortgages carry some risks in the long run. However, they typically offer up-front fixed-rate terms that can last from three to ten years, which you can take advantage of right away. Additionally, ARM rates typically start lower than fixed-rate mortgage rates.
As of April 28, 2022, the average interest rate for a 5/1 ARM (meaning there is a five-year fixed term, after which your rate is adjusted annually based on the market rate) is 3.78%, compared to an average 30-year fixed rate Mortgage rates are 5.1%.
6. Think twice about FHA loans
FHA loans are attractive because they only require a 3.5% down payment and require a minimum credit score of 580. In contrast, with traditional loans, you can usually expect an interest rate of at least 5% with a minimum credit rating of 620.
However, while FHA loans are easier to obtain, they require a mortgage insurance upfront payment and ongoing annual premiums. Prepaid premiums will cost you 1.75% of the loan amount, and ongoing premiums range from 0.45% to 1.05% of the loan amount, depending on the loan amount, loan term, and the amount you originally deposited. These extra fees can make your mortgage unaffordable.
Additionally, many FHA borrowers cannot get rid of mortgage insurance premiums unless they refinance. On the other hand, borrowers can remove PMI from traditional loans once the loan-to-value ratio reaches 80%.
7. Improve your credit score
If you have a credit score of 620 or higher (580 for an FHA loan), you can technically be approved for a mortgage, but mortgage lenders reserve the best deals for borrowers with a credit score of 700 or higher interest rate.
Working to improve your credit score can take time, but if it can help you lower your interest rate a bit, the long-term savings could be significant.
Use a free credit monitoring service like Experian to access your FICO score, which is used by most lenders. Your score can give you a high-level view of your overall creditworthiness.
Also, be sure to check your credit report—you can get a free copy of each report every week at AnnualCreditReport.com until the end of 2022, and one free copy every 12 months thereafter—to see what factors affect Your score and what steps you can take to avoid possible problems. Paying off loans, reducing credit card balances, and questioning inaccurate credit information can all help improve your score.
8. Shop around
While it’s easy to find average mortgage rates, each lender has its own method of pricing loans. Therefore, it is important that you apply to three or more mortgage lenders to find out which one will give you the best interest rate.
Also, if you want to try negotiating a lower interest rate with the lender of your choice, shopping can help you save on transaction costs and even give you a bargaining chip.
Working with a mortgage broker can help with this process, as brokers often work with multiple lenders, but find out which lenders your broker works with and consider comparing yourself to other lenders for comparison.
9. Choose a shorter term
Mortgage lenders typically offer lower interest rates to borrowers with maturities of less than 30 years, because shorter maturities mean lenders will recoup their investment sooner.
For example, as of April 28, 2022, the average rate on a 30-year fixed-rate mortgage was 5.1%, while the average rate on a 15-year mortgage was 4.4%. It’s not a drop like ARM, but it might be worth it if you don’t want the hassle of refinancing it later.
However, before considering this option, check your budget to see if you can afford a higher monthly payment in the short term. “Be sure to factor in inflation in your day-to-day expenses before committing to paying higher fees,” Biston said.
Again, use a mortgage calculator to find out how much it costs.
10. Refinance from your ARM
If you’re an existing homeowner and have an ARM, refinancing into a fixed-rate mortgage may save you money. This is especially true if your ARM’s fixed-rate term is about to expire or you’re already experiencing variable rates on your loan.
Before refinancing, however, consider upfront closing costs and how they can affect your budget. You should also consider how long you plan to stay indoors. If you sell within the next year or two, the savings likely won’t exceed the cost of refinancing.
Unfortunately, you can’t predict what your mortgage rates will be in the next few years, but you can run some numbers to see how your up-front costs compare to your long-term savings.
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