Mortgage rates are at a 23-year high. Here’s what buyers can do to cut costs

 In Mortgage, Real Estate

Homebuyers looking for a lower mortgage interest rate should consider buying mortgage points.GETTY IMAGES/ISTOCKPHOTO

Inflation ticked up in July and the benchmark interest rate is already at a 22-year high. With homebuyers already squeezed by current economic conditions, more unwelcome news came out on Wednesday: mortgage rates are now the highest they’ve been in 23 years. As such, mortgage applications are currently at a 28-year low, according to the Mortgage Bankers Association (MBA). The average rate on a 30-year conventional mortgage rose to 7.31% last week, the MBA said, up from the prior week’s 7.16%.

With rates this high and the forecast for immediate relief unclear, many buyers may feel resigned to paying the higher costs, or risk being eliminated from the current real estate market in full. Fortunately, there are still some things buyers can do to cut costs. While they won’t be able to get in the 3% to 4% range from the recent past, they may not have to pay the current elevated rate being offered either.

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What homebuyers can do to cut costs now

Here are three ways homebuyers can reduce costs in today’s market.

Consider mortgage points

Mortgage points function as a fee the buyer pays the bank or lending institution to get a lower interest rate. Using today’s rates as an example, a buyer could potentially buy points to lower the 7.00% rate they’ve been offered to 6.75%. This fee can then be paid upfront at closing or it can be rolled in to the overall mortgage loan. While an extra fee isn’t attractive right now, it could be worth it for the money you could save over the life of the loan, so crunch the numbers before declining this opportunity.

That said, mortgage points may not be worth it for you if you’re not planning on staying in the home long enough to recuperate the money you spent to get the lower rate. Similarly, it may not be valuable now if you think you could get an even lower mortgage refinance rate in the near future.

Consider an adjustable-rate mortgage

Adjustable-rate mortgages are precisely what their name implies: mortgages with adjustable interest rates. By considering one now, homebuyers can potentially secure a lower interest rate than what they otherwise would have been offered. While adjustable-rate mortgages aren’t dramatically lower than the average mortgage interest rate, they’re still typically lower (to start).

That said, rates on these mortgages will inevitably rise in the future, making them a risky proposition for those on a tight or limited budget. But it may be worth considering now to reduce costs. Buyers could always refinance to a locked, lower rate in the future.

Make a larger down payment

The more you put down toward your mortgage purchase, the lower your monthly payment will be, so be sure to put as much money as possible down now to effectively fight the much higher interest rate. At a minimum, be sure to put at least 20% of the purchase price down. Otherwise, you’ll have to pay additional private mortgage insurance (PMI) until you reach that threshold.

That said, the more you can put down the better, especially considering the extra interest you’ll be paying with today’s elevated rates.

The bottom line

With high mortgage interest rates, buyers have limited options until the rates fall again. But there are some steps they can still take to cut costs. By purchasing mortgage points, considering an adjustable-rate mortgage and putting down a large down payment, buyers can help reduce the costs they’ll have to pay and better position themselves for a lower mortgage refinance rate in the future.


Source: CBS News

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