Over the last 18 months, interest rates on everything from credit cards to loans have skyrocketed — and that includes mortgage loans. While 2% to 3% mortgage rates were common at the height of the pandemic, the Federal Reserve has raised their benchmark rate nearly a dozen times since March 2022 to try and temper the ongoing issues with inflation.
And, consumer borrowing costs have climbed higher with each Fed rate increase, which has led mortgage rates to hit their highest point in over two decades. The 30-year mortgage rate now hovers above 7.5%, where it has sat for the last few weeks.
Add in the other housing market issues — like elevated home prices and ongoing inventory shortages in most markets — and it’s easy to see why housing affordability is at a record low. But if you’re a homeowner or plan to buy a home in the near future, there are a few ways to help cut down on the costs associated with your mortgage.
6 ways to lower your mortgage costs in today’s high rate environment
If you employ the strategies below, you may be able to lower your mortgage costs and make homeownership more affordable.
Opt for an adjustable-rate mortgage loan
An adjustable-rate mortgage (ARM) is a type of mortgage loan that offers an initial fixed-rate period, during which your interest rate remains constant. After this initial period, the rate adjusts periodically — usually annually — based on a specific financial index.
One of the primary benefits of ARMs is that these loans often come with lower initial interest rates compared to fixed-rate mortgages. In today’s high-rate environment, this can result in lower monthly payments during the initial fixed period, allowing you to save money early on. By taking advantage of the lower initial rate, you can save substantially on interest costs while you’re in the home.
In general, though, ARMs are best suited for borrowers who have short-term plans for their homes, such as those who anticipate relocating or refinancing within the initial fixed-rate period. That’s because the interest rate on the loan can climb higher if rates go up after your initial fixed-rate period ends, resulting in you paying more in interest.
Pay for points or buy down the rate
You can also consider paying for mortgage points if you have extra funds available at the time of purchase or refinance. With mortgage points, you pay a percentage of the loan amount upfront in exchange for a lower interest rate. While this requires an initial investment, it can result in long-term savings on interest costs.
Or, if you’re in a buyer’s market, you may be able to negotiate a deal where the seller or builder pays to temporarily buy down the rate for a year or two in order to temporarily lower your interest rate. That can help you to save money in the short term — or the long term if you’re expecting rates to decline and plan to refinance before the rate buydown ends.
Consider a shorter-term loan
Although shorter loan terms, such as 15 or 20 years, may have higher monthly payments compared to 30-year mortgages, they often come with lower interest rates. For example, as of September 11, 2023, the average 15-year mortgage rate was 6.79%, while the 30-year mortgage rate averaged 7.56% — nearly a full point higher.
In a high-rate environment, opting for a shorter loan term may help you lock in a lower rate and pay off your mortgage faster, ultimately reducing your total interest costs.
Improve your credit score
Your credit score plays a vital role in determining the interest rate you qualify for. A higher credit score can help you secure a more favorable rate, even in a high-rate environment.
If you have time prior to applying for a mortgage, consider taking steps to improve your credit by paying bills on time, reducing credit card debt and addressing any errors on your credit report. A better credit score can lead to substantial savings on your mortgage over the long run.
Shop around for lenders
Don’t settle for the first mortgage loan offer you receive. Instead, shop around and compare quotes from multiple lenders. Each lender may have different rates and terms, so it’s essential to do your due diligence. The rate you’re offered with one lender could end up being vastly different from the rate you’re offered with a different one.
It may also benefit you to consider working with a mortgage broker who can help you find the best loan options based on your financial situation and goals.
Make extra payments
Another way to save on mortgage costs is by making extra payments toward your principal balance. This reduces the overall amount of interest you’ll pay over time. For example, you can consider making bi-weekly payments instead of monthly ones, which effectively results in an extra payment each year.
Alternatively, you can make occasional lump-sum payments whenever you have extra funds available, such as a tax refund or a work bonus. These additional payments can significantly shorten the loan term and reduce the total interest paid.
The bottom line
In today’s high interest rate environment, it’s crucial to be proactive and strategic in managing your mortgage costs — and that’s true whether you’re buying a new home or looking to reduce expenses on your current mortgage. Luckily, there are ways to better navigate the challenging interest rate landscape. By refinancing, making extra payments, improving your credit, exploring different loan terms, shopping around for lenders and considering point options, you’ll have a better chance of saving money over the life of your loan.