With U.S. mortgage rates more than doubling since the pandemic, real estate and lending experts say borrowers can still lower their monthly payments by negotiating interest-rate points, comparing lenders and improving their credit scores before applying.
Mortgage rates have climbed sharply since the pandemic, reaching an average of 7.18 percent and leaving many prospective homeowners facing monthly payments hundreds of dollars higher than they would have paid five years ago.
But buyers should not give up, say experienced real estate agents and mortgage brokers. Although borrowing costs remain elevated, a strategic approach to applying for a mortgage can help secure a significantly lower rate.
The key is knowing how to negotiate and where to focus available cash, according to Robert Shamie, CEO of mortgage lender Fidelity Residential.
“Think like a shopper, not an applicant,” Shamie told The Independent.
Just as consumers compare prices before making major purchases, homebuyers should shop around for the best mortgage terms rather than accepting the first offer they receive.
Buy mortgage points instead of increasing the down payment
Purchasing a home generally involves two major financial commitments: a mortgage loan and a down payment. While a larger down payment reduces the amount borrowed, experts say buyers may sometimes save more by using additional funds to purchase mortgage points.
Mortgage points are upfront fees paid to a lender in exchange for a lower interest rate. One discount point typically costs 1 percent of the loan amount, although the reduction in the interest rate varies depending on the lender and loan terms.
For example, a buyer might pay an additional $15,000 upfront to secure a mortgage rate that is one percentage point lower.
John Gluch, owner of Gluch Group/eXp Realty, told The Independent that purchasing points can sometimes reduce monthly payments more significantly than putting the same money toward a larger down payment.
“Deploying an extra $10,000 toward a down payment on a $500,000 purchase only shaves a fraction off the principal, saving roughly $65 to $70 a month,” Gluch wrote.
“Allocating that same $10,000 toward interest rate points… can reduce the monthly payment by $200 or more.”
Buyers may also be able to negotiate with sellers to cover the cost of purchasing mortgage points.
Kevin Watson, regional manager at Churchill Mortgage, said buyers can ask their real estate agents to include a mortgage rate buydown in the purchase contract. If the seller agrees, the expense can be covered as part of the closing costs, subject to applicable loan-program limits.
“Logic would tell you that a larger down payment would help you get a better rate, but that is not always the case,” Watson said.
Compare lenders and use competition to your advantage
Today’s mortgage market differs significantly from the one homebuyers faced five years ago, particularly when it comes to the differences in rates offered by individual lenders.
These differences are known as the mortgage rate “spread” – the gap between the interest rates offered by competing lenders.
During the pandemic, mortgage rates offered by different lenders were relatively similar, according to mortgage broker Josh Jankelow, owner of Olympus Financial LLC.
Today, however, the gap is considerably wider, creating opportunities for borrowers willing to compare offers.
“Lender pricing is far more spread out than it used to be,” Jankelow said. “The gap between lenders on the same loan more than doubled after 2022. For borrowers who shop, that spread is opportunity.”
According to Jankelow, comparing offers could save borrowers between $50 and $100 a month.
Ryan Meehan, a property tax expert and owner of TaxDrop, recommends obtaining quotes from at least three different lenders.
“Different lenders’ rates can vary wildly,” Meehan said.
For the most accurate comparison, buyers should provide lenders with their actual income, financial information and other relevant details.
This helps prevent unpleasant surprises later in the process, such as receiving a significantly higher interest rate or being required to make a much larger down payment than initially expected.
Improve your credit score before applying
A borrower’s credit score is another major factor in determining mortgage rates. Generally, higher credit scores help borrowers qualify for more favorable terms.
Even a small difference can have a significant financial impact over the life of a mortgage.
“Pricing moves in tiers, so a borrower at 738 instead of 740… can pay noticeably more for the exact same loan,” Jankelow said. “Most people have no idea how close they are to the next tier.”
Experts recommend working with a mortgage lender well before beginning the homebuying process to identify opportunities to improve credit.
Watson suggests speaking with a loan officer six to 12 months before planning to purchase a home. This gives borrowers enough time to address outstanding debts, improve their credit profiles and prepare their finances.
One important step is reducing credit card balances to below 30 percent of their available limits.
According to credit bureau Experian, the percentage of available credit being used – known as the credit utilization ratio – is an important factor in calculating credit scores.
Reducing that ratio can help improve a borrower’s credit profile. MoneyLion estimates that lowering credit utilization from 50 percent to 30 percent could increase a credit score by 20 to 50 points, although individual results vary.
Timing also matters.
Experts recommend paying down credit card balances three to six months before applying for a mortgage. This allows creditors time to report updated balances to credit bureaus and gives credit-scoring systems time to reflect the changes.
“Card issuers update credit bureaus on different 30-day billing cycles, and credit scoring algorithms need a reporting cycle to reflect the change,” Gluch said.
With mortgage rates remaining elevated, experts say preparation and comparison shopping can make a meaningful difference. Buyers who plan ahead, strengthen their credit and negotiate with multiple lenders may be able to reduce their monthly payments and make homeownership more affordable.
