A real estate expert explains how to get a good mortgage interest rate
- Mortgage rates have gone up. The current average rate for a 30-year mortgage is around 5.5%.
- When rates rise, home buyers lose their purchasing power.
- Strategies like doing a “mortgage buyout” or shopping around for lenders can help you get a lower rate.
Mortgage interest rates have been on the rise since hitting historic lows in the second half of 2021.
According to Freddie Mac, the current average rate for a 30-year mortgage is around 5.5%, which is considerably higher than the average rate of 2.88% the same week a year ago. And despite falling slightly from the pandemic high of 5.81% in June alone, experts predict that rates won’t drop significantly again until the end of 2023.
When rates rise, homebuyers lose purchasing power because more of their housing budget has to be spent on interest payments instead of principal.
It’s not an ideal scenario – especially since house prices are expected to continue to rise this year – but it shouldn’t discourage buying real estate right now, noted investor Dana Bull.
Rather than focusing on factors beyond your control, “find out what your personal goals are and find an opportunity that will support those goals,” the Massachusetts-based real estate consultant and investor told Insider. “You really have to put yourself at the center of the equation instead of putting market conditions at the center of the equation.”
Bull has built a portfolio of 22 homes in five years. She is financially independent, thanks to the rental income she generates from her investment properties, and now coaches other investors who wish to build wealth through real estate.
“At a high level, it’s important for buyers to see the big picture when it comes to reducing overall costs and increasing their buying power,” she said. “Buyers need to understand whether they are negotiating from a position of strength or weakness. How competitive is a particular home they are bidding on and how motivated is the seller? there a lever to get money out of the transaction?
Buyers can also save big by negotiating credit with the seller at closing or by negotiating that the seller covers closing costs, she added. There may also be local first-time home buyer credits or tax incentives that investors and regular home buyers should look into.
But the “little things” like getting a lower interest rate can also save you a lot of money over the life of your loan. Here are three strategies that can help you fight rising rates:
1. Lower the rate
A “mortgage buy-out” involves pre-paying a lower interest rate.
You buy what are called “rebate points” or “mortgage points”, which are one-time fees you pay the lender to get a lower rate for the term of the loan (or a certain number of years ).
“By paying this one-time fee up front, you can get a lower interest rate, making your monthly payments more manageable in the future,” Bull explained in an Instagram post. “Typically, you will pay several thousand dollars to reduce the interest rate by 0.25%.”
Lowering your interest rate means saving on your monthly mortgage payment and paying less interest over time. The catch is that your closing costs will be higher. Typically, a buyout will take a few years to break even in interest savings, so buyers or flippers who intend to sell within five years would be better served saving their money. Find out whether or not this strategy makes sense for you, according to loan officers and other experts.
2. Extend your mortgage rate lock-in
As we’ve seen over the past year, mortgage rates can fluctuate widely, rising and falling daily based on factors such as inflation, the employment rate, and changes in the federal funds rate.
A mortgage rate lock freezes your rate in place and protects you from fluctuations. This is common practice when applying for a loan, but usually these locks expire within a short period of time.
“If you’re putting a property on contract that’s at risk of being delayed, you’ll want to explore an extended rate lock,” Bull said. You could face a closing delay if you buy a house under construction or a building with tenants whose moving date could be extended. “If your trade goes past the original close date, an extended lockout can protect you against rate increases.”
Lockdown periods are usually 30-60 days but can be longer, she added: “360 days was the maximum I heard of and that was for a property under construction.”
3. Shop around for lenders
Regardless of interest rates, it’s a good idea to find a lender who will offer you the best rate based on your credit score and debt-to-equity ratio. Call a few lenders and see what they can offer. Then, when you have multiple quotes, see if your preferred lender will match the lowest rate you received. However, it’s important to keep in mind that shopping around with more than a few lenders could have a short-term impact on one’s credit rating due to the number of hardships in a short period of time.
“It always pays to speak with a few mortgage originators and/or brokers,” Bull explained. “By taking this initiative, not only can you find out who has the lowest rates, but you can also find a lender who sweetens the deal with closing cost credits or other incentives.”
You can also negotiate with your lender to get the best rate and terms, she added. A seemingly small difference in your rate could save you thousands of dollars over the life of your loan. Some lenders will offer appraisal fee reimbursement or other promotions to lock in a buyer, so be sure to ask if there are any incentives a lender may offer that others do not in order to earn your company.