It’s no secret that mortgage interest rates have increased by a pretty wide margin over the past year. Many of the leading research agencies expect the average 30 yr fixed rate to remain above 7% for the start of 2025. The good news is many of these same agencies expect interest rates to decrease into the 6% range at some point during the year.
But what options are available today to get the most competitive rate and save money on your next home purchase? These tips for combating higher mortgage rates are focused mainly on Jumbo loans but also apply to other mortgages as well.
- Get pre-approved: Getting pre-approved allows you to lock in an interest rate for 90 days, meaning that if rates go up or down during that period, your loan will stay the same. Some lenders can also offer a free rate “float down” in the event that mortgage rates decrease during the time of your lock period.
- Piggyback loans for Jumbo buyers: Jumbo loans present a greater risk for lenders, therefore they often come with slightly higher interest rates. A common tactic mortgage companies use is breaking up a borrower’s loan into two separate loans. By doing this, the buyer can often keep their primary first mortgage at or below the conforming loan limit, thus taking advantage of the lower conforming interest rates. Then they use a smaller second “piggyback” loan to make up the difference. This is a great option for buyers that need smaller Jumbo loans in the $800K-$1.5M range.
- Temporary interest rate buydowns: A popular option for Jumbo loan borrowers is a temporary interest rate buydown. 2/1 buydowns and 3-2-1 temporary buydowns have gained a lot of popularity this year as rates increased. Many lenders provide this option, you get a reduced interest rate for the first 1, 2, or 3 years and then your rate adjusts to the permanent rate. This can provide reduced payments during the early years of homeownership.
Since none of these programs have early payoff penalties, homeowners can refinance anytime without concern. Let’s say rates decrease significantly in 2024, buyers can lock in a lower permanent rate during, or after their temporary interest rate buy-down period if they choose.
- Compare different payment options: Many lenders offer multiple payment options, from traditional fixed-rate mortgages to adjustable-rate mortgages. Generally, a short-term ARM program like a 3, 5, or 7-year will have lower rates.
- Check for discounts: Many lenders offer discounts if you purchase points to reduce the rate on your loan; be sure to ask if this option is available.
- Increase your down payment: The more money you put down, the lower risk for the lender, which will often result in a lower interest rate over time. This is especially true when your down payment is less than 20%. The difference in interest rate between a buyer putting 5% down vs a 10% down payment can be 0.5% or more.
- Increase credit score: Just like your down payment amount, your qualifying credit score plays a big part in your final interest rate. Oftentimes little things like paying down credit card balances, etc, can quickly increase your credit score by 20–40 points. This little bump in your credit score can have a big impact and often save you .25% in rate reduction alone.
- Shop around: Get quotes from multiple lenders to find the best rate; don’t be afraid to ask about loyalty discounts or negotiate better terms if they are available. Different banks and lenders have different rate offerings and fees, so it pays to do your research and speak with several financial institutions before you make a decision.
Home buyers who have questions can connect with us 7 days a week by calling the number above or submitting the Quick Contact Form on this page.
