With both home prices and interest rates rising, many buyers are crunching the numbers and wondering how they can catch a break.
To help find the answer, we talked to real estate agents, investors, and mortgage professionals to gather their tricks of the trade for lowering mortgage costs when interest rates are high.
Here are 12 strategies for making sure you're getting the best possible deal on your mortgage.
1. Start reviewing your finances well in advance
"The most overlooked way to get better terms on a loan is the one that everybody knows about but nobody does," says Dan Green, a former loan officer and founder of homebuyer.com. He suggests that buyers start early with a formal pre-approval to see what type of loan they can qualify for with their current credit score and financial picture.
"Many people will take months in their home search," suggests Green. "That is a terrific time to rehabilitate your credit if you need to, and make small changes to improve how you look to your lender." Steps to increasing your strength as a borrower might include:
- Checking for credit report errors
- Removing any collection items
- Understanding where your credit score deficiencies are
- Lowering your debt-to-income ratio
- Bringing down your credit utilization
In his career, Green has seen home buyers improve their credit scores by over 100 points in just a few months. That modest increase could save you half a percent or more off your interest rate.
"But it's not just about getting a lower rate," says Green. "It's about giving yourself more options. What I've seen in my career is that the buyers who are most prepared are the ones who get the best deals. The ones that are rushed into a decision end up overpaying."
2. Take advantage of seller concessions
"Seller concessions are when the home seller agrees to take a portion of the proceeds and pay for your closing costs," explains Green. He advises that lenders will usually allow sellers to contribute up to 3% of the total cost of the mortgage at closing.
That amount can go a long way to paying down your interest rate. As the market has cooled over the last couple of months, Colorado-based realtor Sean Gilliam has seen sellers offer as much as $20,000 in concessions to help a buyer secure better mortgage terms — just so long as they agree to pay the full asking price on the home.
If you're up for a little home improvement, seller concessions can also be a great tool for increasing the value of a fixer-upper, says licensed real estate broker and investor Nick Polyushkin.
"Sometimes the concession amount will be substantial enough to do renovations and increase the home value. You can then refinance at the new appraised price," suggests Polyushkin. "So if a house needs work, you can offer the full asking price but request a seller concession for repairs in the amount you were advised it will cost you to renovate."
3. Ask if your real estate agent offers a commission rebate
Often, real estate agents (like the agents we match home buyers with at Clever) are willing to offer buyers a portion of their commission as a rebate, applied to what you owe at closing. You can allocate this type of rebate to pay for mortgage points to help you buy down your interest rate.
Generally, an upfront contribution of 1% of your home price will lower your interest rate by about .25 of a percentage point. So if you get a rebate of .5% from your real estate agent ($2,250 on a $450,000 loan), and can come up with an additional .5% either out of pocket or through seller concessions, you could bring a 5.15% interest rate to under 5%, saving you about $62 every month, or a $744 year.
Just keep in mind that a few states prohibit rebates. These include Alaska, Iowa, Kansas, Louisiana, Mississippi, Missouri, Oklahoma, Oregon, and Tennessee.
4. Talk to multiple lenders, but don't choose one right away
"Realize that the lender with the best mortgage rates today may not be the lender with the best mortgage rates six months from now," says Green.
"Like insurance carriers," explains Green, "mortgage lenders are balancing a massive risk portfolio that is made up of hundreds of thousands of loans. You don't want to be over-concentrated in a particular area or type of mortgage."
Managing risk is an ongoing balancing act for lenders. Some days your loan type will be more attractive to certain lenders, and the rates they offer will vary accordingly. Green advises that you talk to multiple lenders to get a sense of the terms they'll offer, but don't make a final decision on a lender too far in advance.
5. Look at more than a loan's APR
"APR isn't a good metric to shop by," suggests Green. "People get tricked into that, but it can make the total cost of a loan look deceptively low. Prioritizing APR is fine if you want to stay in your house for 30 years, he suggests, but most people don't. So in that instance, you also need to look at the fees associated with getting the rate you want.
"The difficulty that homebuyers have is that mortgage rates and mortgage fees go in opposite directions," says Green. You can pay more upfront to lower your interest rate, or pay a higher interest rate in exchange for a lower down payment and help with closing costs. "It's two variables," says Green, "and doing straight comparisons when there's two variables is impossible."
To ensure you're comparing apples to apples when shopping around for a home loan, Green suggests that you do one of the following:
- Decide what interest rate you want to pay, and ask each lender what the closing costs will be
- Decide on how much you can afford to pay upfront, and ask each lender what your interest rate will be
"It's really the only way to compare multiple lenders," Green concludes. "And the caveat is, do your shopping at the same time, because mortgage rates change all the time."
6. Take advantage of down payment assistance
Recent research from Real Estate Witch found that millennial home buyers cite saving for a down payment as one of the three greatest barriers to home ownership. Fortunately, the U.S. is home to more than 2,500 first-time home buyer programs offering down payment assistance and other benefits, including low-cost mortgages and help with closing costs.
Common forms of assistance include low down payment mortgage loans allowing you to put as little as 3% down, and grants that cover a significant portion of your closing costs. Certain banks also provide matched savings programs, offering up to $22,000 in down payment assistance.
Some programs are set up to offer forgivable or deferred-payment loans, meaning they're either canceled after you've made a certain number of mortgage payments or repayable when you sell the house — in which case, the equity you've built up may be more than enough to cover the loan and still leave you with a profit.
While these programs are generally funded through federal agencies like the U.S. Department of Housing and Urban Development (HUD), they're typically accessed through your county or state Housing Finance Agency (HFA), or a participating lender.
7. Consider making a mortgage payment every two weeks
If you're looking to build equity, one strategy is to make a mortgage payment biweekly, instead of monthly. At the end of the year, you'll have made the equivalent of an extra mortgage payment, and all the extra you've put in will be applied to your principal — as opposed to being absorbed by interest. Just be sure your loan doesn't include any penalties for making extra payments. Most newly issued loans don't.
"Paying a mortgage every two weeks so that you make that extra payment toward your principal is a great plan," says real estate investor Tomas Satas. "I do this with all of my investment properties to help build equity."
The strategy goes even further if you commit to living below your means when purchasing a home to live in. "Sure, I could have a much larger, newer home," says Satas, "but this allows me to throw extra money at the principal nearly every month, and saves me thousands upon thousands in interest. I can use the equity and money saved to upgrade at a later date if I want."
On the flipside, cautions Dan Green, "paying biweekly may save money in the long-term, but it's not going to do anything in the short-term. And some would even say that there may be better uses of your money." One possible scenario is if investing your money elsewhere will net you more than paying down your mortgage.
8. Consider an adjustable rate mortgage (ARM)
"With interest rates so high and continuing to rise for the foreseeable future, the best bet for most buyers is to look at adjustable rate mortgage (ARM) loans," writes real estate agent and investor Elizabeth Boese. These types of loans offer a fixed interest rate for a set number of years, followed by a variable rate based on the going interest rates at that time.
Boese explains that ARMs come with 5-year, 7-year, and sometimes 10-year fixed rates. "So, for example," she says, "a 7/1 ARM means the interest rate is fixed for seven years, then the rate can change every year from year eight onwards. A 7/6 ARM means the interest rate is fixed for seven years, then the rate can change every six months.
The benefit of an ARM, according to Boese, "is that the initial fixed rates are often lower than what you'd get with a conventional 30-year fixed mortgage." So if you plan to sell within five to seven years of buying, which most homeowners do, you could save a lot of money over a traditional 30-year fixed rate mortgage.
And even if you don't intend to sell, you may be able to refinance when rates are lower. "You could opt for a cash-out refinance if there is additional appreciation on the home," says Boese, "or pay off more of the principal to get a lower monthly payment with your new loan."
9. Look for rent-to-own opportunities
"In a rent-to-own situation," says avid real estate investor Wesley Williams, "the seller agrees to sell a property to someone who probably won’t qualify for a conventional loan. "You come to an agreement on a down payment (usually much less than 20%), then pay the normal rental rate, plus an additional agreed upon amount that goes towards your purchase of the house."
During this time, you'll ideally take steps to repair your credit and improve your financial situation ahead of re-applying for a mortgage. Then, after an agreed upon amount of time — "usually 24 to 48 months," says Williams, "you'll have the option to buy the house with a conventional loan, assuming you now qualify."
The key to this type of deal, says Boese, "is to negotiate the down payment and the percentage of your monthly rent that goes toward owning the home." That's because, in a rent-to-own situation, there's a chance you could lose everything you put in.
If at the end of the rental period, you aren't able to move ahead with purchasing the home, you'll forfeit both your down payment and monthly rent — including the amount set aside to purchase the house.
Boese also notes that finding a seller willing to enter into a rent-to-own agreement can be more difficult, as most sellers want to get their money from a property and be done. She advises that, "your best bet is to make this type of offer on a rental property owned by an individual investor."
10. Consider rolling over your FHA loan to a conventional loan
Government-backed FHA loans can help you secure a relatively low-interest mortgage even with less-than-ideal credit. However, they come with a caveat: You'll be required to pay private mortgage insurance (PMI) over the entire life of the loan. Mortgage expert Dan Green suggests that refinancing to a conventional loan can help you avoid that long-term cost.
If you're not familiar with private mortgage insurance, it's essentially insurance you pay to cover the additional risk to a mortgage issuer when you put less than 20% down on a home. Depending on the total loan amount and the sum you put down, PMI can range from about .5 to 1.5% of your total loan cost each year, spread across your monthly payments.
With 10% down on a home costing $450,000, and annual PMI of .5%, you'll pay an extra $169 in PMI each month.
With a conventional mortgage, you can generally cancel PMI once you've attained 20% equity in your home — either through paying down the principal or seeing significant appreciation in your home value. In some cases, you can cancel PMI in as little as a year.
However, with an FHA loan, your PMI never goes away. Refinancing to a conventional mortgage once you've achieved 20% equity can save you that extra insurance payment every month.
11. Revisit your insurance policies after you buy
If you've moved into a new home and taken out a homeowners insurance policy, you may be able to get a discount by bundling your auto insurance with the same company.
"It's a commonly overlooked tactic to save some money," advises Green, who estimates insurance bundling could take 15–25% off your insurance costs overall.
Even taking your new address and shopping around for a different provider could land you savings, especially if you're going from renting to owning a home. Studies have found that homeowners tend to pay less for car insurance that renters. 
12. Lower your monthly payment by extending the length of your loan
If your primary concern is a manageable monthly payment, suggests real estate veteran Bill Gassett, you could consider taking out a 40-year mortgage to allow you more time to pay it off (and thus allow for a lower monthly payment).
The caveat with this strategy is that, just like a 30-year loan is going to offer a higher interest rate than a 15-year loan, a 40-year mortgage is going to offer a slightly higher interest rate as well. So while you may reduce your monthly payment, you're going to pay a lot more in interest over the life of your loan.
Monthly payment and interest on 30-year vs. a 40-year mortgage
|30-year fixed rate mortgage||40-year fixed rate mortgage|
You'll also have a lot more of your monthly payment absorbed by interest, so if you want to sell a few years down the road, you may not have a ton of equity to show for it. With this strategy, you'll need to weigh whether the monthly savings are worth the big-picture costs.
A final consideration with a 40-year mortgage term is that it typically isn't available on government-backed loans (VA, FHA, or USDA) or through every lender. So, you may need to shop around for this type of loan offering.
Keep in mind that none of these tips will be a magic bullet. A home is going to cost what it costs no matter what. But taking advantage of these insider strategies may just make the difference between being able to stretch your budget to afford a home or not.