It’s no secret that our economy isn’t doing as well as it has in the past. In addition to things like fuel and groceries rising in price, in just 10 months mortgage rates have gone from historic lows to what now seem like drastic heights.
Of course, history will tell us that these rates really aren’t that awful. After all, 10%+ interest rates used to be common. Nevertheless, it can be hard for someone to feel good about getting a 7% interest rate on a mortgage when they could have gotten a 3.5% just 10 months ago. To put in in perspective, on a $300,000 house with a 20% downpayment, a 7% interest rate would cost you roughly $600 more a month than a 3.5% rate.
Fortunately, there are a few ways to “beat the system” if you will. And no, I will not be giving advice on ways to increase your credit score to ever so slightly lower your rates. The strategies I employ can help you secure a rate significantly lower than the average rates today. With that being said, let’s get started.
1. Loan Assumptions
Typically when buying a home, it is a good idea to shop around for rates and have lenders compete against each other to get you a brand new, shiny mortgage.
In this case, that is not what you will be doing. Sometimes sellers have loans that are assumable by the buyer. That means if the owner got their mortgage whenever they were cheaper, or the refinanced when rates were fantastic (many did), you will have the option to take their loan- and their unbeatable rate.
This is a fantastic way to get a great rate in any market, as long as the seller has one. There is one issue with this method. Because houses have been appreciating so rapidly and the owners have been paying down their mortgage, you should not expect them to be selling the home for what they owe on the mortgage. Instead, you will either need to pay the difference in cash (down payment) or receive a second loan. Even with a second loan, there is still huge potential for savings.
Let’s say you come across a house for sale for $250,000, and the owner has a mortgage for $175,000 at a 3.25% interest rate. You buy the property with a 10% down payment, or $25,000. You also assume their loan for $175,000, and finally you receive a new loan for the remaining $50,000 at 7%.
If you had got an entirely new loan for $225,000 at 7%, you might be looking at a $1,500 monthly payment. But since you assumed their loan and got a smaller one in addition, your payments should look more like $1,100.
2. Port Mortgage/Mortgage Transfer
Think of the Loan Assumption strategy, but YOU are the seller- and you don’t want to give your amazing rate away, you want to keep it! Well when it is time for you to sell your property and move into another, there is another option that may work for you.
Porting your mortgage is taking an existing loan on a property and transferring it to another property. All terms and conditions remain the same, including the interest rate.
It is important to note that the same situation can arise as with assuming a mortgage where you could need an additional mortgage if the home you are purchasing costs more than your current loan amount. Most of the time, fixed rate mortgages can be ported, but Adjustable Rate Mortgages may not, or may need switched into a fixed rate before they can be.
3. Mortgage Points
A mortgage point is an optional upfront fee you can choose to pay when you close on your home. A mortgage point will typically cost 1% of the total loan amount, and one mortgage point will decrease your interest rate by 0.25%.
Now, while this can be a great way to save some money in the long term, the really cool thing you can do is negotiate these from the sellers. When negotiating on a house, perhaps you reach an agreement with the seller to pay $200,000 for the home if they will pay $8,000 in closing costs. That money could help you keep more cash in your pocket when closing, but if you already have that money budgeted out, you could use the $8,000 to buy 4 mortgage points and reduce your interest rate by 1%. It may not sound like much, but it will surely save you money over the span of a 30-year loan.
4. Adjustable Rate Mortgages
This one is surely the least exciting of the four, but also the easiest to qualify for. An adjustable rate mortgage, or ARM, is a mortgage that does not have a fixed interest rate. Instead, the interest rate is tied to an index, such as the rate for Treasury securities or the Cost of Funds Index.
The good thing about these rates is that they have an initial fixed-rate period which is usually 5, 7, or 10 years, and the interest rate during this initial period often beats the rates for other fixed rate loans.
Once the fixed rate period is over, your interest rate will adjust upwards or downwards as the Index it is tracking moves. Most ARMs will adjust annually, but some can adjust as often as monthly, or as rarely as every 5 years.
There are also “caps” set in place to limit how much a ARM can rise or fall. There are typically three:
- Initial adjustment cap– This cap shows how much the interest rate can increase- or decrease- the first time it adjusts after the fixed-rate period is over. 2% and 5% are commonly used, meaning they can’t change more than that amount.
- Subsequent adjustment cap– This cap shows how much the interest rate can change in the adjustment periods that follow. This cap is often 2%, meaning that the new rate can’t be more 2% higher than the previous rate.
- Lifetime adjustment cap– This cap shows how much the interest rate can increase or decrease over the life of the loan. This cap is often 5%, meaning that the rate can never be 5% higher than the initial rate during the fixed rate period.