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Mortgage rates are painful right now. Here are 5 ways to make your mortgage cheaper.

By Brett Holzhauer

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May 14, 2024

Homeownership has been one of the landmark ways to build long-term wealth in the United States for generations. And if you've owned your home for the last few years, you've likely seen your home value appreciate. Now, you can see those real-time changes in Origin with our brand-new Zillow integration.

Connect with Zillow (opens in new window)

However, for those looking to enter the market, rising home prices and mortgage rates have made homeownership increasingly challenging. If you're determined to become a homeowner, here are a few ideas to move your monthly mortgage closer to being affordable.

The Data Abounds

According to the 2022 Survey of Consumer Finances, the median homeowner has 38 times the household wealth of someone who doesn’t own a home. However, this doesn’t mean that homeownership is a guaranteed ticket to financial resilience. Additionally, it’s not a blanket investment everyone should undertake, especially in a high-rate and high-price environment.

A recent U.S. News survey suggests that two-thirds (67%) of potential homebuyers are sitting on the sidelines until mortgage interest rates come down, with 26% looking for rates to get below 5% before buying. But as inflation remains stagnant, the Fed has clarified that they won’t be meaningfully dropping rates for the foreseeable future.

So should you simply rent forever, waiting for improved economics to give you the green light? We don’t think so. 

Homebuyers have no control over interest rates set by the Fed, but what you do have control over is the home you purchase and the mortgage terms you agree to. And if you’re in a position where you can afford and are personally ready to buy, a high-interest rate shouldn’t be the sole reason to keep you away from it.

Here are five ways you can bring the cost of a mortgage down so you can finally purchase the home you’ve been desiring.

Shop, shop, shop

Right now, the mortgage on your home is more expensive than the actual home itself. Here’s what this means:

Let’s say you buy a home for $417,700 (the median home sales price), with a 20% down payment, with a 30-year fixed rate mortgage of 7.22%. If you make the minimum payment ($2,273 for principal and interest) for the entire 30-year mortgage, you will pay approximately $484,000 in interest. This means the home you bought will cost you roughly $900,000 – not including any property taxes, insurance, repairs, or improvements.

But if you can work that interest rate down by shopping, you could make a significant difference in your overall costs. Here’s how much you would pay over 30 years.

Interest rate

Total interest paid over 30 years

7.22%

$484,035.28

7%

$466,182.93

6.875%

$456,109.60

6.75%

$446,087.94

Simply put: it pays to shop. Homebuyers can potentially save $600-$1,200 annually by shopping around for the lowest interest rate possible, according to Freddie Mac.

So before you run to Zillow (although you probably already have), be sure to talk to multiple lenders and have them compete for your business. The time investment could potentially save you thousands of dollars.

Look into lenders with full banking relationships

Some banks aren’t interested in selling you a mortgage and moving on. Some institutions want to create a full banking relationship where you have the entirety of your financial life with them, including checking, savings, credit cards, and other financial products. As an incentive, they may give you better offerings in terms of rates.

If you’re discussing lending options with a bank, ask if they offer full banking relationship discounts. Even a small interest rate discount for moving your money could mean tens of thousands of dollars in savings.

Loan assumption

During the pandemic, millions of people jumped at the opportunity to either purchase or refinance their homes as mortgage rates were at all-time lows. Now, as rates have skyrocketed, those low-interest mortgages on homes have become desirable – and you could still reap the benefits of it through mortgage loan assumption. 

Here’s how it works

Let’s say that you’re buying the same $417,700 home (reference above) and the seller owes $200,000 on the home at a 3% rate. If they have a qualifying loan, you could simply take over the loan responsibility. However, you would have to come with the difference of $217,700. Additionally, only certain mortgages can be assumed, including FHA, VA, and USDA loans.

There are a few hurdles you have to jump through to make this work, including qualifying for the mortgage and verifying they have an assumable loan. If it’s assumable, it could make the home-buying process lengthier. Lenders are not in a hurry to process these as they make far less revenue than underwriting new loans.

But with patience and due diligence, you could potentially get a mortgage for far cheaper than what people are paying today.

Buy points down

If you have cash on the sidelines outside of your down payment, you may consider simply buying down the interest rate of your mortgage. 

Each .25% of your mortgage’s interest rate is considered one point, and one point usually costs 1% of the total amount borrowed. Doing this can potentially save you tens of thousands throughout your mortgage. Here’s how those numbers shake out on a $400,000 mortgage with a 7.25% interest rate on a 30-year fixed-rate mortgage. 

Points bought down

Effective interest rate

Buy down cost

Net interest saved over 30-years

1

7%

$4,000

$24,298

2

6.75%

$8,000

$48,352

3

6.50%

$12,000

$72,156

4

6.25%

$16,000

$95,701

In most cases, lenders will only let you purchase up to four mortgage points.

Note: Weigh the options of saving the funds of buying points versus refinancing the entire mortgage if interest rates come down.

Get rid of PMI as quickly as possible

The average down payment on a home varies widely, but in many cases, it’s less than 20% of the purchase price of the home. For those who put less than 20% down, you’ll have to pay a monthly fee for private mortgage insurance (PMI).

This is put in place to protect the lender in the case that you default on your mortgage. This fee varies on the mortgage amount, ranging from 0.2% to 2% of the loan amount per year. On a $400,000, 30-year fixed rate mortgage, this would be $800-$8,000 per year, or $66-$666 per month. In my case, my PMI was just under $100 a month.

However, this fee isn’t forever. You can get your PMI removed once your home reaches 80% LTV (loan-to-value). For example, if you buy a $350,000 home with a 5% down payment, your LTV is 95%. You can get the LTV to 80% in one of three ways: pay down the mortgage faster, the value of the home appreciates, or a combination of the two.

When you connect your home value to your Origin dashboard, you can see your estimated home value in real time. It may not be exact, but it can give you a good idea of how much equity you have to potentially knock off the PMI payment.

I purchased my home with a 5% down payment and had to pay PMI for less than a year. Thankfully, my home value appreciated due to market conditions and improvements I made. After an appraiser gave my home a higher valuation and was now under 80% LTV, the lender removed the PMI from my monthly mortgage payment.

Lastly: once you hit 78% loan-to-value, your lender is required by law to remove PMI. However, this will only go off of the appraised value when you purchase the home, not the fair market value. 

The bottom line for home shoppers

The home shopping landscape can feel extremely frustrating right now as home prices have shot up in tandem with interest rates. If you aren’t fully ready to take on the financial responsibility of a mortgage, that’s perfectly ok. Renting is cheaper than owning in the vast majority of the U.S. And while you’re renting, you can continue to invest in other ways, including the stock market and your retirement accounts.

But if you’re ready to buy a home, know the slogan of many real estate agents today: Marry the house and date the rate. Rates will remain elevated for the future, but this doesn’t mean you’re stuck with it forever.