5 tips for finding a cheap mortgage in a high-rate environment

In today's high-rate environment, securing an affordable mortgage may seem like a daunting task. The uptick in interest rates that has occurred over the last few years has significantly impacted the cost of buying a home with a mortgage, as mortgage payments and overall loan costs can increase significantly with even a slight rate increase.  

And, rates have increased more than just slightly since 2020 and 2021. While it was common to find rates hovering near 3% at that point, 30-year mortgage rates currently hover well above 7% on average and it's unclear where they may head in the future. As such, it can be quite costly to finance the purchase of a home right now. 

It doesn't have to be, though. With a little strategic planning and careful consideration, it's still possible to find a mortgage that won't break the bank even in the midst of the challenges caused by today's high-rate market.

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5 tips for finding a cheap mortgage in a high-rate environment

There are a few ways you can find an affordable mortgage in today's high-rate environment, including:

Research extensively

In a high-rate environment, thorough research is your best ally. Start by comparing interest rates from various mortgage lenders, including traditional banks, credit unions and online mortgage lenders. Don't limit yourself to the first offer you receive; shop around to understand the range of rates available in the market.

You may also want to consider working with a mortgage broker who can leverage their network to find the best deals for your specific financial situation. Brokers often have access to lenders and loan products that may not be readily available to the public, potentially unlocking better terms for your mortgage.

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Improve your credit score

Your credit score plays a crucial role in determining the mortgage loan interest rate you'll be offered. So, in a high-rate environment, taking steps to improve your credit can make a significant difference in the cost of your mortgage. 

Start this process by obtaining a copy of your credit report and checking for any inaccuracies. Immediately take steps to dispute any errors you find and work toward paying off outstanding debts to boost your score.

It can also help to avoid opening new lines of credit or making major purchases in the months leading up to your mortgage application. New credit lines or big purchases can be a red flag to lenders. Conversely, lenders view a higher credit score as an indication of lower risk, which may result in more favorable interest rates and loan terms.

Consider an adjustable-rate mortgage

In a high-rate market, it may also be worth exploring adjustable-rate mortgages (ARMs) as an alternative to fixed-rate mortgages. The main benefit of ARM loans is that they will typically have lower initial interest rates, allowing you to benefit from more affordable payments during the first few years of the loan. However, it's essential to understand the risks associated with ARMs, as interest rates can fluctuate over time.

If you opt for an ARM, carefully review the terms, including the initial fixed-rate period, adjustment frequency and rate caps. Assess your financial stability and ability to handle potential increases in interest rates in the future. For those planning to stay in their home for a shorter period, an ARM might be a cost-effective choice.

Save for a larger down payment

A high-rate environment doesn't only affect interest rates; it can also impact the down payment amount that makes sense when buying a home. After all, saving for a larger down payment can help offset the higher interest rates and potentially qualify you for a more competitive loan.

For example, while it can be smart to make a down payment of at least 20% on a conventional mortgage loan, some lenders may offer better terms if you can put down a larger percentage of the home's purchase price. So, it can be beneficial to evaluate your budget and explore ways to increase your down payment savings, such as cutting unnecessary expenses or redirecting windfalls like tax refunds or work bonuses.

Explore government programs

Government-backed mortgage programs can be a valuable resource, especially in a high-rate market. For example, programs like Federal Housing Administration (FHA) loans and Department of Veterans Affairs (VA) loans often have more flexible qualification criteria and lower down payment requirements.

Research the eligibility criteria for these programs and determine if you qualify. While FHA loans may be particularly suitable for first-time homebuyers with lower credit scores, VA loans are specifically designed to assist eligible veterans and active-duty military members. If you're able to take advantage of these programs, it can open up affordable mortgage options — even in a challenging rate environment.

The bottom line

Finding a cheap mortgage in a high-rate environment requires diligence, careful planning and a willingness to explore various options. By researching extensively, improving your credit score, considering alternative mortgage types, saving for a larger down payment and exploring government programs, you can improve your chances of securing a mortgage that aligns with your financial goals. Remember, though, that staying patient and persistent is key when navigating the complexities of the mortgage market, as it can help you achieve both homeownership and financial peace of mind.