Over the past year, mortgage rates have been relatively steady near their all-time lows.
This has continued to benefit existing homeowners who wish to refinance their mortgages. And has exacerbated an already too-hot housing market.
But there has been increasing talk of rate increases, with the Fed eyeing a possible taper to its bond buying program.
If they do announce such a plan, it could lead to an interest rate spike, especially if the economy improves and COVID gets under control.
Of course, the jobs report released last Friday was very poor, with blame being tied to the more infectious Delta variant.
In short, reopenings and tourism/hospitality have been struggling once again as more folks stay at home.
However, if and when that does change, you need to be prepared. I’ve compiled a list of ways to keep your mortgage rate down if we do see another taper tantrum and mortgage rate fiasco.
Just Buy It Down by Paying Points
- Want an even lower mortgage rate than what’s being offered?
- Simply pay discount points at closing and you’ll get one
- This is a surefire way to get your hands on a discounted rate
- It’ll cost you a little more upfront, but your monthly payment will be lower for the life of the loan
Yes, your closing costs will be higher, but your rate will be lower for the duration of your mortgage term.
If 30-year fixed rates rise, you might be able to buy the rate back down below 3%. Just be warned that chasing a certain psychological threshold might not make good financial sense.
For example, it may cost an arm and a leg to get a rate below 3%, but very little to get the rate to 3.125% or 3.25%. And the difference in monthly payment could be negligible.
Lower Your LTV to Improve Pricing
- Another trick is to come in with a larger down payment on a home purchase
- Or pay down your mortgage balance a bit before refinancing
- This could help you avoid some unnecessary pricing adjustments
- Which means you’ll actually qualify or those low advertised interest rates
Another way you can bring that mortgage rate down is by lowering your loan-to-value ratio. This means either putting more money down on a home purchase or borrowing less for a refinance.
So instead of going with 10% down, maybe see what rates are like with a 20% down payment, assuming you can handle the cash outlay.
Or when refinancing a mortgage, maybe bring money to the table or avoid cash out to keep the interest rate at bay.
A lower LTV equates to fewer pricing adjustments, which means you can qualify for the lowest rates available with a given lender.
Improve Your Credit Before You Apply
- Work on your credit scores months before applying for a home loan
- Even simple things like paying down credit cards can help
- Or simply avoiding new lines of credit in the lead up to your application
- This will ensure you qualify for the lowest mortgage rates possible
While you’re at it, you might want to see if you can spruce up your credit. A low credit score will increase your mortgage rate, sometimes significantly.
If you’re able to improve your scores before applying for a mortgage, you should qualify for a lower interest rate.
Simple things you can do include paying down credit card balances and avoiding new lines of credit. Also avoiding new charges on your credit cards will help lower your credit utilization.
It might take some time for these moves to reflect in your scores, so take action early. But if you need the changes to apply immediately, ask your loan officer about a rapid rescore.
Go with an ARM Instead of the 30-Year Fixed
- If fixed mortgage rates are too high check out alternatives
- It’s OK to look beyond the default 30-year fixed-rate mortgage
- There are hybrid ARMs that offer a fixed rate for 5-7 years or longer
- These could be a good alternative if you don’t plan on staying in the property for long
There’s also the ARM option. If you feel fixed mortgage rates have risen too much, you can expand your horizons and look at adjustable-rate mortgages.
There are plenty of hybrid-ARM options that offer a fixed-rate period for five, seven, or even the first 10 years of the mortgage.
Most people move or refinance before that time anyway, so it’s worth at least considering an ARM if you can handle the potentially higher rate once it resets.
You will enjoy lower monthly payments during the initial fixed period and pay down the mortgage faster thanks to a lower rate.
When the rate is close to resetting, you can refinance again, sell the property, pay it off, etc.
Yes, there’s risk here, but it’s one option to at least consider.
Shop Your Mortgage Rate More
- Here’s a no-brainer that most consumers fail to do
- Just shop around at more than one bank or lender to improve your rate
- Many borrowers obtain just one quote, which sounds cliché but is sadly true
- Put in a little more time and you’ll increase your chances of saving money on your mortgage
If and when mortgage rates move higher, you’ll need to be a lot more picky when it comes to lender selection.
At the moment, you can’t really go wrong (to some extent). But if rates worsen, you better pay a lot more attention to what’s going on and shop accordingly.
Not all lenders react to the market the same way, so the spreads can widen significantly from mortgage company to mortgage company.
Some may have increased rates more than necessary out of an abundance of caution, while others may still be offering aggressive pricing to bring in customers and stay competitive.
It could pay to get a few quotes just to see what’s out there.
Just Wait It Out for Better
- If mortgage rates aren’t favorable, wait for the trend to become your friend
- Rates constantly change direction throughout the year as news happens
- There are often periods of strength and weakness (don’t panic!)
- Simply timing your application could be enough to get the rate you want
Lastly, you could just pump the brakes and wait for the dust to settle. We humans have a tendency to panic and buy when we should sell, and vice versa.
If the stock market tanks, folks often hit the “sell” button when it could actually be beneficial to buy at a discount.
Similarly, it might be prudent to wait if mortgage rates jump, as they often reverse course once news is digested.
There’s still plenty of uncertainty out there, and uncertain times usually call for volatility, which is often accompanied by lower interest rates.
This isn’t a sure thing, but it’s also not a sure thing that mortgage rates will continue to stay put at their low, low levels.
The good news is you always have options if things take a turn for the worse.