Lowering Interest Rates on a Home Loan
Borrowers who took out FHA mortgages at around 5% five years ago would likely balk at buying or refinancing at 2023 rates. But some can’t wait to make a decision. They need to act now. What can these people do to lower their interest rates?
ARM Loans and Discount Points
The most obvious choice is an adjustable rate mortgage, with the longest introductory rate possible. But there is also the option to purchase discount points, which may also lower the rate on your mortgage.
Discount Points Are Separate From Your Down Payment
When you buy discount points on a fixed-rate mortgage, you are not making a larger down payment but are paying up front (or having the costs financed where allowed) to lower the mortgage rate.
Forbes.com notes, “Buying points does not help you build equity in a property—you just save money on interest.” That’s why we include the emphasis here on points being totally unrelated to the down payment. It would be easy to assume as a first-time buyer that the reverse is true.
Typically, when you buy points, you are paying to reduce a percentage of the interest. Buying one point may lower your rate by .25%. Over a 30-year loan term, that adds up. Buyers who choose to pay points should save for those expenses ahead of time.
Discount Points on Adjustable Rate Mortgages
Some home loan transactions may permit the purchase of discount points on adjustable rate home loans. In such cases, borrowers should know that these points are not necessarily applicable over the full term of the home loan, depending on the loan program and its regulations.
You may find ARM loan discount points apply only to the introductory rate and disappear once the rate adjustments begin. The best advice here? Ask the lender whether discount points are allowed on their ARM loans and how long that discount applies.
Also, be sure to ask a leading question. “How else can we lower my interest rate?”
Making a larger down payment on top of these steps can also help borrowers save more money over the lifetime of a mortgage loan with higher rates, and paying extra on your home loan each time can also help you pay down the loan principal faster, saving money over time. There are many little ways to help save money on a home loan when rates are higher. The key is to do as many of them as you can afford.
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