How to get a lower rate on your mortgage
Mortgage rates have risen significantly this year — 30-year average fixed rates went from roughly 3.5% in early 2021 to more than 5.6% now, Bankrate data shows — and pros say they will likely go higher. So that makes getting a mortgage for around 4% almost seem impossible. But, spoiler alert, for some people it’s not. Here’s who might be able to get one, and you can see the lowest mortgage rates you might qualify for here.
Look for an ARM, if it makes sense for you
If you want that 4%-ish rate, the best thing to do in today’s mortgage environment, according to Jacob Channel, LendingTree’s senior economic analyst, is to talk to a lender and see if you qualify for an ARM. “Some ARMs might be offered in the neighborhood of 4%, at least during the introductory period. [But] borrowers might have to pay discount points to get down to 4%,” says Holden Lewis, home and mortgage expert at Nerdwallet.
That said, “ARMs can be risky, and in the long run they may end up costing more than a fixed mortgage with a higher upfront rate,” says Channel. Indeed, most ARMs have variable rates that initially start out lower, usually for a period of 3 to 10 years, and then fluctuate, which means they can go up, down or even stay the same — but which direction they’ll go is never guaranteed.
ARMs tend to work best for short-term homeowners who only plan to be in the same home for 5 to 7 years. They’re also ideal for those who predict their income will increase since they’re likely to refinance before the interest rate readjusts.
Explore a shorter-term mortgage
If you can afford a 15-year-term, you may be able to land that coveted 4%-ish rate, pros say. Average fixed rates for 15-year mortgages are about 5%, but remember that that is just the average, so you can get lower if you have an excellent credit score, good financials and/or you buy discount points.
Though not as common, there are also 10-year mortgages, which give homeowners the opportunity to pay off their loans sooner. These shorter terms often have lower interest rates than 30-year fixed mortgages, and homeowners get the benefit of building equity more quickly.
Buy discount points
Basically, discount points are fees paid to reduce an interest rate. “They’re actually prepaid interest. When you pay discount points, you’re handing the lender a chunk of interest payments up front in exchange for paying less interest every month,” says Lewis.
The rule of thumb for discount points is that one point roughly decreases the interest rate by 0.25%. “Each offer is unique, so it might take more or less than two discount points to cut the rate by 0.5%,” says Lewis.
However, there may be limits to how many discount points you can buy. Today, a lot of lenders are offering 30-year fixed-rate mortgages around 5.5%. “Theoretically, it would take six discount points to reduce the rate on a fixed-rate mortgage from 5.5% to 4%. That would be a fee of $24,000 on a $400,000 loan assuming the lender would underwrite a loan with that many discount points,” explains Lewis. But the reality is that a lender may be reluctant to do this because of caps on total points and fees for a loan.
The break-even point for purchasing discount point depends on your loan size, interest rate and the loan term. If you’ll be living in the home for many years, it can make sense to purchase discount points.
Have the right mix of attributes
Outside of getting an ARM, to get a super low rate you’ll likely need a mix of attributes. These may include a credit score of 760 or higher, enough cash to put 20% or more toward a down payment, the ability to buy three or four mortgage discount points and to afford a shorter-term mortgage, says Channel.
The most important thing to do before getting a mortgage, according to Robert Heck, VP of mortgage at digital mortgage marketplace Morty, is to shop around and explore your options, both in terms of lower rates and all available loan programs. “Shopping around is something that many buyers don’t pursue, often due to time,” says Heck. Go online to compare a range of mortgages on their rates, terms and down payment options.
Even if you do all these things, it may be hard to get a 4% mortgage. Indeed, pros say, you may also need a little luck. “With mortgage rates already so much higher than they were at the start of the year and continuing to climb, the unfortunate reality is that locking in a rate under 4% is probably going to be something that most borrowers can’t do,” says Channel.
And remember, even if you can’t get that coveted 4%-ish rate, that doesn’t mean you can’t buy a house. “Accepting a higher rate on a fixed-mortgage can often be preferable to spending all of your money on discount points or seeking out a riskier type of loan like an ARM,” says Channel.