- Mortgage rates have been on the rise. The current average rate for a 30-year mortgage is around 5.5%.
- When rates go up, home shoppers lose buying power.
- Strategies like doing a “mortgage buydown” or shopping 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 2.88% average rate from the same week one year ago. And despite a slight drop from the pandemic high of 5.81% just in June, experts predict that rates won’t drop significantly again until late 2023.
When rates go up, home shoppers lose buying power, since more of their housing budget has to go towards paying interest instead of principal.
It’s not an ideal scenario — especially since home prices are expected to keep rising this year — but it shouldn’t discourage one from buying real estate right now, emphasized investor Dana Bull.
Rather than focusing on factors that are outside of your control, “figure out what your personal goals are and go and find an opportunity that’s going to support those goals,” the Massachusetts-based real estate consultant and investor told Insider. “You really need to put yourself in the center of the equation instead of putting market conditions in the center of the equation.”
Bull built a 22-unit portfolio in five years. She’s financially independent, thanks to the rental income she generates from her investment properties, and now coaches other investors who want to build wealth through real estate.
“At a high level, it’s important for buyers to look at the big picture when it comes to reducing overall costs and boosting their purchasing power,” she said. “Buyers need to understand if they are negotiating from a position of strength or weakness. How competitive is a particular home they are submitting a bid on and how motivated is the seller? Does the buyer have leverage to squeeze money out of the transaction?”
Buyers can also save big by negotiating a credit back from the seller at closing, or 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 shoppers should look into.
But the “small stuff,” 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 combat rising rates:
1. Buy down the rate
A “mortgage buydown” is when you pay for a lower interest rate upfront.
You buy what are called “discount points” or “mortgage points,” which are a one-time fee you pay to the lender in order to secure a lower rate for the life of the loan (or a certain number of years).
“By paying this one-time fee upfront you can land 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%.”
Buying down your interest rate means saving on your monthly mortgage payment and paying less interest over time. The catch is, your closing costs will be higher. Typically, a buydown will take a few years to break even on interest savings, so buyers or flippers who intend to sell within five years would be best served saving their cash. Read up on whether or not this strategy makes sense for you, according to loan officers and other experts.
2. Extend your mortgage rate lock
As we’ve seen over the past year, mortgage rates can fluctuate dramatically, moving up and down every day depending on factors such as inflation, employment rate, and changes to the Fed funds rate.
A mortgage rate lock freezes your rate in place and protects you from fluctuations. This is standard practice when applying for a loan, but typically these locks do expire within a short period of time.
“If you put a property under agreement that is at risk of a closing delay, you’ll want to explore an extended rate lock,” said Bull. You might deal with a closing delay if you’re buying a home that’s being built or a building with tenants whose move-out date could get extended. “If your transaction misses the original closing date, an extended lock can give you protection against increasing rates.”
Lock periods are typically 30 to 60 days, but can extend longer, she added: “360 days was the max I have heard about and that was for a property that was being constructed.”
3. Shop around for lenders
No matter what interest rates are, it’s smart to shop around for a lender who will offer the best rate based on your credit score and debt-to-income ratio. Call up a few lenders and see what they can offer. Then, when you have various quotes, see if your preferred lender will match the lowest rate you received. However, it is important to keep in mind that shopping around with more than a few lenders could have a short-term impact on one’s credit score due to the number of hard pulls within a quick period.
“It’s always advantageous to speak with a few mortgage originators and/or brokers,” explained Bull. “By taking this initiative, not only can you learn who has the lowest rates, but you may find a lender who is sweetening the deal with closing cost credits or other incentives.”
You can also negotiate with your lender to secure the best rate and terms, she added. A seemingly small difference in your rate could end up saving you thousands of dollars over the duration of your loan. Some lenders will offer a refund for appraisal costs or other promotions to get a buyer locked in, so be sure to ask if there are any incentives that a lender can offer that others aren’t in order to win your business.