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For the last three years, potential homebuyers and refinancers have been awaiting lower interest rates like a post-SAT teen hoping to hear back from their favorite college. But unlike anxious students, property buyers have been holding out longer than expected.
The wait may have been in vain, though, because there are several clever hacks to strategically lower your interest rate and get into the real estate market faster.
1. Avoid the Rush With a Midweek Lock-In
When rate shopping, especially for higher mortgage amounts, fine margins make a big difference over time. Locking in an interest rate in the middle of the week, when lender volume is likely at its lowest, as opposed to a Monday, Friday, or the weekend, could help you get the best deal.
“One buyer was able to lock on a Wednesday, after lender volume decreased for midweek, and locked in a rate 0.15% less than the rate they were offered from the previous Monday,” Ben Mizes, real estate agent, investor, and CEO of Clever Real Estate, told MarketWatch. “In this case, the rate difference on a $400,000 loan saved them about $12,000 over the life of the loan.”
2. Consider an Adjustable-Rate Mortgage (Only if it Makes Sense for Your Long-Term Goals)
If your goal is to refinance to a lower rate, choosing an adjustable-rate mortgage can be a little like playing Russian roulette with a fully loaded gun—only to find rates are higher when your ARM expires.
When the cost of refinancing is factored in, ARMs often backfire. However, they can be a good move for investors who don’t plan to hold their property for a long time, such as flippers, BRRRR proponents, or those who intend to move from their primary residence after renovating it and living there for two years to take advantage of capital gains breaks. In these instances, an interest-only mortgage can be a good choice for obtaining the lowest possible monthly payment.
3. Go Old School With a High Credit Score and Down Payment
Before terms such as “creative financing” came into play, the method of obtaining the best mortgage from your parents’ generation—assuming you are between Gen Z and Gen X in age—involved having an excellent credit score and putting down the largest down payment possible. Here’s some sobering news: Your parents were right.
Leveraging low down payment loans in the current mortgage environment is not the best strategy. Rather, raise your credit score to 740 or higher, and throw everything and the kitchen sink at the down payment amount to reach the magical 20% mark to offset PMI. When rates drop, you can refinance and pull cash out if your house price has gone up and still avoid PMI.
4. Negotiate Seller Credits and Maximize Lender Incentives
Negotiating a seller credit during the sale of a property can have significant benefits over the life of the mortgage.
Chris Desino, a real estate broker and owner at Ocala Horse Properties, told MarketWatch:
“I negotiate seller credits with a single purpose: Permanent buydown first, [and put] everything else second. If the lender allows, I pair this with single-premium PMI paid with the same credit. The payment falls twice. No monthly PMI drag, cleaner cash flow from day one. Portfolio banks discount for loyal deposits and autopay. I ask buyers to open accounts early and move payroll so we can unlock relationship pricing.”
5. Date the Rate, Marry the House to Capitalize on an Appreciating Market
This oldie but goodie is often overlooked when buyers fixate on interest rates to determine whether they should buy. “Home prices continue to increase at 5% to 6% year over year… the longer the buyer waits, the more they lose the opportunity to improve their net worth,” Neil Christiansen, a specialist from Churchill Mortgage, told the New York Post.
Buying now and waiting for an opportune time to refinance will net you more in equity than savings from a rate drop.
6. Consider a Credit Union
Local credit unions may not have all the bells and whistles of your mainstream national lender, but they can offer you a lower interest rate. Credit unions are nonprofit organizations that traditionally serve the local community, so look in your neighborhood to find one. This government comparison chart offers an idea of potential savings.
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7. Go Back to the Future With a Retro Financing Move: The 2-1 Buydown
Jump in the DeLorean and fire up the flux capacitor, because here’s another old-school move from the ‘80s, when interest rates were at a mind-boggling 20%.
A 2-1 buydown allows homebuyers to pay a lower interest rate for the first two years, with the seller covering the difference. This enables the seller to sell the home without lowering the price. The strategy has been employed most recently by homebuilders offering incentives to buyers to purchase a new home. They help give a buyer some breathing space before a higher mortgage rate kicks in in year three.
8. Find Your Debt Sweet Spot and Boost Earnings for a Strong DTI
Debt is a mercurial creature: If you have no debt, your credit score might be impacted, resulting in a higher mortgage rate. But too much debt can also impact your credit score, potentially resulting in a higher interest rate.
There is a debt sweet spot, however, that lenders use to calculate your debt-to-income ratio (DTI):
The housing-to-income ratio (HTI) equals the sum of your monthly housing payment, divided by your current income.
The back-end DTI consists of your monthly housing payment, plus all other monthly debt, such as a car payment and credit card balances.
Your DTI ratio equals your gross monthly debts divided by your monthly gross income.
Banks uniformly use the same DTI ratios when calculating your approval and rate favorability:
Your front-end HTI calculation should not exceed 28% when applying for a mortgage.
Your back-end DTI ratio should be at or below 36% for the optimal mortgage rate.
The lower your DTI, the better rate you are likely to get. Thus, boosting your income and reducing your debt is a powerful move when shopping for a loan.
9. Consider a Smaller Multifamily Instead of a Single-Family
Investment-minded buyers—which we all are—should consider buying a two-to-four-unit home as a primary residence to offset the cost of a higher mortgage rate with rental income.
Using an FHA mortgage with a 3.5% down payment to secure financing could be a financially better move, even when factoring in PMI and a higher rate, due to the additional income. Lenders will also consider this when qualifying you for a loan.
Final Thoughts
While nothing beats a meaningful rate cut when securing a mortgage, there are still multiple strategies potential buyers can employ to find the lowest monthly payment, regardless of overall rates. By shopping around with different lenders, positioning yourself for a smart refinance when the time comes, aligning your loan choice with your overall goals (FHA for multifamily, or an interest-only for a short-term hold), and using affordability rules and credit strategies, you can navigate the turbulent waters of real estate financing without capsizing during the process.
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