5 strategies for dealing with today's high mortgage rates

Over the last couple of years, mortgage rates have climbed from extreme lows to levels not seen in decades. In late 2021, the average rate on a 30-year fixed mortgage was hovering near 3%. But persistent inflation led the Federal Reserve to start raising its benchmark interest rate in 2022 and into 2023, forcing consumer interest rates to climb in tandem. And, while Fed rate hikes have been paused recently, at 7.36%, today's average 30-year mortgage rate is still much higher than it was just a few years ago.

These higher borrowing costs have made buying a home significantly more expensive for prospective buyers. For example, when buying a $400,000 home with 20% down, the monthly mortgage payment (principal and interest only) has gone from about $1,350 at 3% to over $2,100 at 7%. That's an over 50% increase in costs from rising rates alone, and that's not accounting for the home price appreciation that occurred over this period, either.

Between today's elevated mortgage rates and home values, the affordability challenge for buyers is very real. That's why many would-be homebuyers are looking for smart ways to mitigate the high costs of buying a home today by locking in a decent mortgage deal. And, the good news is that there are a few ways you can still do that.

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5 strategies for dealing with today's high mortgage rates

Here are some strategies buyers can consider when dealing with today's high mortgage rate environment:

Make a larger down payment

The more you can put down, the lower your overall mortgage amount will be and the less in total interest you'll pay. Lenders also tend to offer the best mortgage rates to the buyers who are the least risky to lend to, and if you're capable of putting more down on your home, you're less likely to default on your loan. In turn, you could snag a lower mortgage rate by making a higher down payment (provided that the rest of your borrower profile supports it). 

Putting at least 20% down also helps avoid costly private mortgage insurance (PMI). An extra PMI charge can add hundreds of dollars to your loan costs each month, so avoiding that extra charge — and potentially securing a lower rate — could make the extra down payment costs worth it. 

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Explore an adjustable-rate mortgage

Opting for an adjustable-rate mortgage (ARM) loan could also be another strategy worth employing right now. An ARM loan comes with a fixed period of interest followed by a variable rate, meaning that the mortgage rate can change over time depending on the overall rate environment. While these loans can be riskier long-term if rates climb in the future, there's a good chance, given today's high-rate environment, that rates will, at some point, adjust downward in the future. 

That can be a positive for homeowners with ARM loans. If rates decline after your loan's fixed-rate loan period, you could end up saving money on interest charges in the future. That can make an ARM worthwhile — and it can also be a smart move if you plan to move or refinance before the adjustment period starts.

Look into first-time homebuyer programs

If you're buying a home for the first time, it could be worth looking into assistance programs in your area that are geared specifically toward first-time homebuyers. Many state and local housing authorities offer special mortgage programs to help first-time and lower income buyers overcome down payment and affordability hurdles. These may include lower interest rates, discounted mortgage insurance premiums or even grants for down payments or closing cost assistance. There are often income limits, but these programs can make buying much more affordable in today's high-rate environment.

Get a piggyback loan

Another strategy to consider employing is a piggyback loan. With this approach, you can potentially get a lower overall mortgage rate and avoid PMI, as you're taking out two simultaneous loans on the home purchase instead of one. This, in turn, can result in lower mortgage loan payments.

For example with a piggyback or "80/10/10" loan, you get:

• A first mortgage for 80% of the home's purchase price
• A second smaller "piggyback" mortgage for 10% of the purchase price
• You put 10% down in cash

So for a $500,000 home purchase, you might get:

• First mortgage for $400,000 (80%) at a 7% interest rate
• Second piggyback mortgage for $50,000 (10%) potentially at a lower rate like 5-6% since it's a smaller loan amount

By splitting your mortgage into two pieces, you are essentially putting 20% down between the 10% cash down payment and 10% second mortgage. This allows you to avoid having to pay private mortgage insurance premiums.

The main advantage of the piggyback approach comes if you can secure a lower interest rate on the smaller 10% second loan compared to the rate you'd get on a single larger 90% mortgage. Even if the rate on the first 80% loan is the same, the blended overall rate between the two loans may beat what you'd pay on a conventional 90% mortgage with PMI.

Buy discount points to lower your rate

Buying mortgage points upfront can also potentially reduce your effective mortgage rate. One discount point typically costs 1% of the total mortgage amount and allows you to permanently buy down your interest rate by about 0.25%.

For example, if you're taking out a $400,000 mortgage at 7%, buying 1 discount point would cost $4,000 upfront but could lower your mortgage rate to around 6.75%. Over the full loan term, this could save you thousands in interest payments.

The more points you buy upfront, the lower your mortgage rate goes. While an upfront investment, buying discount points can make sense if you plan to stay in the mortgage for several years and the interest savings over time outweigh the upfront cost. However, points are not worth paying for if you plan to sell or refinance the mortgage in just a few years before you can recoup the upfront cost through interest savings.

The bottom line

Higher mortgage rates are likely going to stick around for a while as the Fed maintains its stance against inflation. But there may be solutions to the elevated cost of financing a home in today's high-rate environment, like buying discount points or opting for a piggyback loan. These, and the other smart mortgage strategies outlined above, may help keep monthly payments as low as possible and secure an affordable path to homeownership.