How to Keep Your Monthly Payment Low When Mortgage Rates are High
With mortgage rates currently near 20-year highs, many prospective homebuyers are maintaining a ‘wait and see’ approach. This is keeping many homebuyers sidelined until they see rates drop back down to the all-time low interest rates of the past 10 years. Unfortunately, no one knows when or if that is going to happen.
Other hopeful homebuyers are taking alternate strategies in order to navigate higher rates while securing the lowest monthly mortgage payment possible. Here are some of those strategies for keeping the monthly payment as low as possible to offset higher interest rates when financing your home purchase.
Use a First-Time Home Buyer Mortgage Program
Buyers eligible for first-time home buyer programs can take advantage of various home-buying incentives such as access to lower interest rates and forgivable loans to be used for down payments.
One program that can provide some relief regarding higher interest rates is the Downpayment Toward Equity Act of 2021. Through this program, buyers have access to monies that can be allocated for discount points to buy down the mortgage rate.
Pay for Mortgage Discount Points
Paying upfront for mortgage discount points is a way to get yourself locked into a more palpable rate. Discount points are a fixed fee paid at closing that permanently reduces a buyer’s interest rate. Each mortgage discount point reduces your mortgage rate by approximately 0.25 percentage points. One discount point costs 1% of your loan amount.
Raise Your Credit Score
Raising your credit score is a surefire way to ensure that you can lock in a better rate. A 20-point increase in your credit score will lower your mortgage rate when you go to lock it in.
Some ways to quickly increase your credit score include:
- Reducing credit card balances
- Lowering debt
- Correcting incorrect reporting
Increase Your Down Payment
Buyers with excellent credit can benefit even more by increasing their down payment. By increasing the down payment by 5 percent, a buyer could lower their rate by 0.125 percent. Additionally, lowering the loan amount upfront will reduce the monthly payment. Doing this can offset the higher mortgage rates. Coming up with the additional funds may require making some sacrifices but will be well worth it when it comes to lowering your monthly payment.
Avoid Paying PMI
Private Mortgage Insurance is required by lenders of conventional mortgages when they are lending an amount greater than 80% of the home’s value. Home buyers putting less than 20% down on a new conventional mortgage will be required to carry PMI on their loan. It’s an added cost to the monthly payment which is likely already inflated by a higher interest rate.
Private mortgage insurance rates vary by credit score and other factors and typically range from 0.58% to 1.86% of the original loan amount. PMI can easily add several hundred dollars to the monthly mortgage payment. Paying PMI can be avoided (without increasing your interest rate) by obtaining a VA loan or a conventional mortgage with at least 20% down.
There’s nothing we can do about the fluctuation of interest rates for mortgage loans. The Federal Reserve has that locked down. Fortunately, buyers can take other actions in order to keep their interest rates and monthly payments as low as possible. We likely won’t ever have access to the record-low interest rates we enjoyed throughout the better part of the 2010s. That may sound like bad news for prospective home buyers, but eventually, the relativity of the situation will become the new norm and the market will adjust accordingly. If you are planning to ‘wait and see’ if the rates dip below 4% soon, you may be waiting for a very long time.