For the past two years, American households have felt the pain of rising interest rates. Homebuyers who take out a mortgage with a 7% interest rate may be budgeting a few hundred dollars more than expected to cover the average monthly mortgage payment.
According to a recent survey by Realtor.com, 22% of potential homebuyers said they would be more willing to take out a mortgage if interest rates were below 6%. Most mortgage forecasts don't expect interest rates to fall below that number until 2025.
But you don't have to wait until market rates drop. It may still be possible to get a 6% mortgage rate.
Current mortgage interest rates are around 7%
Mortgage rates change daily, but as of March, the average weekly interest rate for a 30-year fixed-rate mortgage was about 7%, according to CNET's sister site Bankrate.
Generally, interest rates rise when the economy is doing well and fall when there are signs of trouble. When the pandemic plunged the economy into uncertainty in 2020, interest rates plummeted to historic lows and remained below 4% for the next two years.
But high inflation and the Federal Reserve's aggressive interest rate hikes have pushed interest rates higher, reaching 8% last October.
“The underlying economic strength is what supports the volatility and high interest rates,” said Nicole Ruth, senior vice president at Movement Mortgage. He added: “We continue to get economic reports and indicators that show consumers are spending and remain confident.”
The good news for homebuyers is that while mortgage rates are expected to fall slowly in 2024, they won't reach record lows again.
read more: I can no longer take out a 2% mortgage.How to adapt to different housing markets
7% and 6%: What's the difference?
With an interest rate of 6%, you can save money on your monthly payments and over the life of your loan. A one percentage point difference may not seem like much, but the savings add up over time.
For example, let's say you bought a home for $400,000 and made a 20% down payment on a 30-year fixed-rate mortgage. The difference between a 7% interest rate and a 6% interest rate means a savings of $210 per month, or $75,746 over the life of your loan.
How to get a 6% mortgage rate now
Many factors go into determining your mortgage interest rate. Although you can't control economic factors, there are ways to prepare your finances to get the best deals and lower personal rates.
Purchase mortgage points
Mortgage points, also known as mortgage discount points, are upfront fees you can pay your lender in exchange for a lower interest rate on your mortgage. The cost of each point is 1% of the purchase price of the home, usually reducing the rate by 0.25%.
On a $400,000 home, you would pay $4,000 for each discount point. The lender may also allow him to purchase four mortgage points to lower the interest rate from her 7% to 6%, but he would have to pay $16,000 to get there.
To see if this strategy is worth it, calculate the total cost of your points and compare it to your overall monthly savings. “How long will it take to pay it back? Are you going to stay home that long?'' Ruth asked.
In this case, if you pay $16,000 for 4 points and save $210 each month, it will take you over 6 years to break even.
improve credit score
Lenders look at your credit score to determine whether you qualify for a mortgage and the interest rate you will receive. Generally, a high credit score indicates that you have managed your debt responsibly in the past. A good credit history lowers your risk to lenders and can help you secure a lower interest rate.
In fact, according to a 2024 Lending Tree study, raising your credit score from the “fair” range to the “excellent” range can lower your interest rate by about 0.22 percentage points. In the study example, this interest rate difference saved the borrower $16,677 over the life of the mortgage.
increase down payment
A down payment is the amount of money you can pay up front to purchase a home. Each type of mortgage has a minimum down payment, which typically ranges from 0% to 5%, but the higher the down payment, the lower the interest rate. That's because the more you contribute towards your loan, the less risk the lender takes on.
Some mortgage experts recommend making a larger down payment, as much as 20%, instead of purchasing mortgage points, because a down payment lowers your interest rate and contributes to your home equity. . This is because if you sell or refinance your home before you reach the break-even point, you will incur a loss. However, the amount you paid as a down payment becomes part of your equity.
Take out a variable rate mortgage
An adjustable-rate mortgage (ARM) is a mortgage with a fixed interest rate for a set introductory period (such as five years). After that period ends, the interest rate may move up or down at regular intervals for the remainder of the term.
A big appeal of ARMs is that their introductory interest rates are often lower than traditional mortgage rates. At the beginning of March, the average interest rate for 5/1 ARMs was 6.61%, compared to 6.98% for 30-year fixed-rate mortgages.
negotiate mortgage interest rates
When you apply for a home loan, you don't need to go through a pre-approval company. In fact, research shows that getting interest rate quotes from multiple financial institutions and comparing offers can lead to significant savings. If you want to use this strategy, first submit a mortgage application to a qualifying financial institution. Once you have several loan quotes, use the best one to negotiate with the lender you want to work with.
Your loan officer may offer lower interest rates, savings on closing costs, or other incentives to get you to participate in the loan. A Fannie Mae study found that one-third of homebuyers negotiated their mortgage rates in early 2022, and many were able to get better terms.
Shorten the term of your home loan
Almost 90% of homebuyers choose a 30-year fixed mortgage term. This is because it offers the most flexibility in home buying and the lowest monthly payments. Your payments are spread out over a longer period of time, so your payments are lower, but you can always put more money towards your principal. But taking out a long-term mortgage “incurs an opportunity cost of holding the lender's money and having that money invested elsewhere,” Ruth says.
With shorter loan terms (10-year and 15-year mortgages), ARMs have lower interest rates, so you can lower your interest rate now.
Choosing a shorter repayment period can save you money by paying less interest over time. However, don't make the home buying mistake of choosing a shorter loan term just because the interest rate is lower. Because you have less time to repay the money you borrow, a shorter loan term means higher monthly payments, so you need to make sure it fits within your budget.
Is a 6% mortgage rate that affordable?
In short, yes, but it's all relative.
“Six percent is a great interest rate in today's market compared to the historical average of just over 7 percent,” Ruth said. “But homeowners were spoiled with 2.75% mortgage rates a few years ago, so 6% no longer seems like a good idea.”
Homeowners are also feeling the strain of soaring home prices, which are hurting them even more.
However, you can save money on your mortgage by taking some (or all) of these steps. By improving your credit score, increasing your down payment, purchasing points, and negotiating your interest rate, you may be able to get your interest rate from 7% to 6% or even lower.
