According to English physicist Sir Isaac Newton’s third law of motion, what goes up must come down. Apply that law to mortgage rates and it’s more like: what goes up goes back down, then goes back up, then goes back down, etc.
The average rate on a 30-year fixed rate mortgage reached a historic low at the end of 2020, which meant that rates were sure to climb back up again eventually. But while they’re still pretty low in the grand scheme of things, the days of rates in the 2s are likely over for now and may not be seen again for a long time, if ever.
Does that mean you should never make another mortgage transaction? Of course not! While it’s true that nobody wants to pay more for a mortgage than they have to, you can never perfectly align your life with interest rate fluctuations. Whether your family is growing, you need to relocate for a job opportunity, you’re retiring, or you simply want a change of scenery, you’ll need a new home loan regardless of the prevailing rates.
Fortunately, there are several ways you can set yourself up to get a great rate in any market condition.
Keep your credit score high.
Generally regarded as common knowledge and confirmed by NerdWallet.com, borrowers with higher credit scores tend to get lower interest rates than those with lower credit scores. Why? Because those borrowers are deemed more likely to pay back their loans, so lenders see the transaction as less risky, which can translate to a lower rate. So be sure to do (or keep doing) all the things many experts recommend for improving your credit score: pay your debts on time every time, don’t open too many credit accounts, don’t max out your borrowing limits on those accounts, and more.
Increase your down payment.
Contributing a higher percentage of your loan amount as a down payment could qualify you for a lower rate. Again, this goes back to your risk profile. The larger your down payment, the less risky your transaction becomes in the eyes of your lender. Also, the whole point of wanting a lower rate is to save money. Borrowing less means a lower monthly payment and more money in your pocket, in addition to what you could save over the life of the loan with a lower rate. Plus, a higher down payment gives you more equity in your home right away.
Choose a shorter loan term.
If you feel like you can afford a higher monthly payment, you’ll get a lower rate with a 15-year mortgage than you will with a 20- or 30-year loan. You can also build equity faster, pay off your mortgage sooner, and pay less in interest over the life of the loan.
Consider an adjustable-rate mortgage.
An adjustable rate mortgage (or ARM) has an initial rate that’s lower than a fixed-rate mortgage, but the rate changes after an established period of time based on the market conditions on the date of each adjustment. ARMs aren’t for everyone, but they can be a good choice for someone who expects to sell their home before the rate adjusts or has some other special circumstance. Simply seeking to get the lowest rate possible probably isn’t a good enough reason to get an ARM. Be sure to have an honest conversation with your lender about whether an ARM is right for you.
Lock your interest rate right away.
When you decide to take the plunge and buy a new home, be sure to lock your interest rate with your lender as soon as possible after you’re approved for financing. Rates change daily and sometimes hourly, so locking your rate ensures it will stay the same as you and your lender go through the process of closing your loan.
We invite you to check out our mortgage calculators and see for yourself how even the slightest difference in interest rate can affect your monthly principal-and-interest payment, as well as many other variables. We also encourage you to reach out to a Homeowners Licensed Mortgage Professional for a more detailed conversation about interest rates, current market conditions, and your home financing options.
Don’t delay or abandon your homebuying endeavors because rates aren’t at rock-bottom levels. We can help you get a rate you’re happy with, and more importantly, buy a home you’ll be thrilled with for years to come.