This certainly carries some risk, but according to Tyrrell, for the right borrower—particularly one who does not intend to stay in the home for an extended period—an ARM can be a sensible method to save money. “During those first few years, even just a quarter of a % can be a few hundred dollars in monthly savings,” Tyrrell adds. “A seven-year adjustable-rate mortgage will be fixed at that lower rate for seven years, and then it will adjust in year eight,” Foster explains. “Where will you be in year eight when that loan adjusts?”
6. Consider purchasing discount points.
You can use discount points to get a cheaper interest rate. A point costs one percent of the loan amount, or $2,000 on a $200,000 mortgage, and reduces the interest rate by a fraction of a percentage point, usually approximately 0.25 percent. So buying a point would result in a new rate of around 3.25 percent for a borrower who was previously offered a 3.5 percent rate.
If you’re determined to acquire a cheaper mortgage rate, discount points can help you get there, but they’re not for everyone, according to Foster. “See how long it takes you to repay the money you put out for the points,” she advises. Buyers will want to ensure that they can reach the break-even point before purchasing points. For example, if a point costs $2,000 and saves you $20 per month, it will take 100 months—or more than eight years—to pay for itself. If you’re not sure you’ll remain in the house for that long, points are generally not worth the money.
7. Don’t forget to secure it.
Once you’ve found a cheap interest rate that you’re happy with, you’ll need to lock it in with the lender. This ensures that your interest rate cannot change before the loan closes, even if market interest rates rise during that time.
Rate locks can sometimes be costly, especially during prolonged lock durations. On the other hand, these may be worth the extra charge in a rising-rate market, but borrowers should consult with their loan officer to determine the best course of action for their specific situation. “Use a loan officer in whom you have confidence and trust,” Foster advises. “A village is required.”
Conclusion
The majority of the work necessary in obtaining the best mortgage rate occurs well before you are ready to apply. The most effective strategies to minimize your rate are to have a high credit score and a substantial down payment. However, don’t put your trust in your bank, broker, or mortgage lender to secure you the most acceptable terms. Companies might have a financial motive to guide you in one direction or another. Instead, make your purchases, mortgage estimates, and comparisons. Also, keep in mind that you qualify for a specific mortgage amount do not obligate you to borrow that amount.
