Your mortgage's interest rate is one of the "make or break" numbers that determines whether you become a happy homeowner or stay resigned to renting.
If the only mortgages you can currently secure all have sky-high rates, don't despair – you have some workarounds that can help you nab a rate that's more reasonable for your long-term financial health. CNBC Select lists out some tips below that could help you close the deal on your home without becoming house poor.
What we'll cover
- Make a larger down payment
- Choose an adjustable rate loan
- Consider purchasing mortgage points
- Refinance when rates are lower
- Bottom line
Make a larger down payment
Sure, making a larger down payment may mean you have to spend additional time rounding up extra cash upfront. But a larger down payment often means smaller monthly mortgage payments, assuming the same loan term.
This smaller monthly payment can help your budget breathe a bit more and give you added flexibility for other life and home expenses.
Saving a sizable down payment isn't easy, but putting any extra cash (bonuses from work, tax refunds, etc.) toward your down payment savings can help you make progress faster. It can also be helpful to keep your savings in a high-yield savings account, like the UFB Secure Savingsor the Marcus by Goldman Sachs High Yield Online Savings, so you can earn more for your balance.
Of course, you likely won't earn hundreds of dollars in interest but even a couple of extra dollars each month can make a difference.
UFB Secure Savings
UFB Secure Savings is offered by Axos Bank ® , a Member FDIC.
Annual Percentage Yield (APY)
Up to 5.25%APY on any savings balance; add a UFB Freedom Checking and meet checking account qualifications to get an additional up to0.20%APY on savings
Minimum balance
$0, no minimum deposit or balance needed for savings
Fees
No monthly maintenance or service fees
Overdraft fee
Overdraft fees may be charged, according to the terms; overdraft protection available
ATM access
Free ATM card with unlimited withdrawals
Maximum transactions
6 per month; terms apply
Terms apply.
Read our UFB Secure Savings review.
Marcus by Goldman Sachs High Yield Online Savings
Goldman Sachs Bank USA is a Member FDIC.
Annual Percentage Yield (APY)
4.40% APY
Minimum balance
None
Monthly fee
None
Maximum transactions
At this time, there is no limit to the number of withdrawals or transfers you can make from your online savings account
Excessive transactions fee
None
Overdraft fee
None
Offer checking account?
No
Offer ATM card?
No
Terms apply.
Choose an adjustable rate loan
Adjustable rate mortgages are a type of home loan that charges an interest rate that changes over time (usually after a period when the mortgage rate is fixed) based on market conditions. While the Federal Reserve doesn't set mortgage interest rates, factors like inflation and monetary policy can still indirectly influence mortgage rates.
In a high-interest rate environment, adjustable rate mortgages will carry higher interest rates and in a low-interest rate environment, mortgage rates will likely drop. In theory this can be a good strategy to avoid locking yourself into a high mortgage rate (without having to refinance), but it comes with its fair share of uncertainty and risk. Nobody can predict how rates will rise and fall in the future, so there's a chance you could end up paying more in interest if rates continue to rise or plateau at a higher level than they're at now.
Still, adjustable rate mortgages actually tend to become more popular for financing home purchases as interest rates rise. Just make sure your budget can withstand the blow if rates don't drop in the future.
There are several lenders that offer adjustable rate loans. For instance,Chase Bankhas both fixed-rate and adjustable-rate mortgages, in addition to a slew of other types of home loans. Ally Bank is another solid option for an adjustable rate mortgage, especially since this lender doesn't charge certain lender fees (like an origination fee).
Chase Bank
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans
Terms
10 – 30 years
Credit needed
620
Minimum down payment
3% if moving forward with a DreaMaker℠ loan
Terms apply.
Offers first-time homebuyer assistance?
Yes — click here for details
Ally Home
Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
Types of loans
Conventional loans, HomeReady loan and Jumbo loans
Terms
15 – 30 years
Credit needed
620
Minimum down payment
3% if moving forward with a HomeReady loan
Terms apply.
Again, we can't stress enough that you understand the inherent risks of an adjustable rate mortgage since the wrong move could cost you thousands.
Consider purchasing mortgage points
Purchasing mortgage points (also known as discount points) from your lender is another way to lower your mortgage's interest rate by paying extra money upfront. Buying mortgage points permanently lowers your mortgage rate and each point usually costs 1% of the loan amount. This results in a 0.25% rate reduction. Of course, costs can always vary based on your lender.
So on a $500,000 loan, you'd have to pay an additional $5,000 for one mortgage point. A 0.25% rate reduction may not sound like a whole lot, but those savings add up over time. Plus, the rate reduction can help you spend just a little less on housing costs each month.
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Refinance when rates are lower
Refinancing is a popular way to lower your monthly payment and save you cash over time. When you refinance, you're basically taking out a new home loan, often for the remaining amount you owe on the home (but not always).
Ideally, your brand-new loan should come with better terms (after all, that's the point of refinancing). So if your original mortgage carried a high interest rate that became unaffordable, the goal with refinancing should be to secure a lower interest rate. However, your credit score must be in good shape in order to make sure you walk away with the best possible rate.
Rocket Mortgage offers an Interest Rate Reduction Refinance Loan (IRRRL) loan that eligible borrowers can apply for if they're looking to lower their interest rate and potentially save on their monthly payments. Better.com also offers home loan refinancing but one huge draw is that this lender won't charge you prepayment penalties if you pay off the loan early.
Rocket Mortgage Refinance
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loans, FHA loans, VA Interest Rate Reduction Refinance Loan (IRRRL) and jumbo loans
Fixed-rate Terms
8 – 29 years
Adjustable-rate Terms
Not disclosed
Credit needed
580 if opting for FHA loan refinance or VA IRRRL; 620 for a conventional loan refinance
Already have a mortgage through Rocket Mortgage or looking to start one? Check out the Rocket Visa Signature Card to learn how you can earn rewards
Better.com Mortgage Refinance
Annual Percentage Rate (APR)
Apply online for personalized rates
Types of loans
Conventional loan, FHA loan and jumbo loan
Fixed-rate Terms
15–30 years
Adjustable-rate Terms
Not disclosed
Credit needed
Not disclosed
Terms apply.
Bottom line
High interest rates can make getting a mortgage feel even more costly but the good news is that you don't have to be locked into that one high rate forever. Purchasing mortgage points, refinancing and even making a larger down payment are strong options for dealing with a high mortgage rate environment but always be sure to assess your personal situation before making a decision.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review and guide is based on rigorous reporting by our team of expert writers and editors.While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.