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Want a lower mortgage rate in today's economy? Ask about these 2 options

An adjustable-rate mortgage may be worth exploring in today's elevated rate environment. Getty Images/iStockphoto

While mortgage rates may be sitting at a three-week low, they're still exponentially higher than just a few years ago. Rates during the height of the pandemic hovered around the 2% to 3% range. But a 30-year term on August 31, 2023 is 7.52% — more than double what it was in recent memory. And that's relatively low when measured against where rates could be heading later this year and into 2024.

That said, there are multiple steps borrowers can take in order to secure the best and lowest mortgage rate available. This ranges from improving their credit score to making a larger down payment to thoroughly shopping for lenders. There are two options, however, that buyers should seriously consider now — and they won't require timing the market or waiting for your credit score to tick up a few points.

Start by exploring your mortgage rate options here to see what you're eligible for.

2 options homebuyers should consider now

With elevated mortgage interest rates limiting the options for homebuyers, here are two options worth considering now:

Mortgage points

Mortgage points is a term used to refer to the fee a buyer will need to pay a lender to reduce the prevailing rate. This fee can then be rolled in to the overall mortgage loan or it can be paid by the buyer when they close on the mortgage loan. 

While mortgage points won't get borrowers the rates they could've got in 2020 or 2021, they can still make a sizable difference, particularly when measured against a 30-year mortgage loan. So, the difference between 6.75% and 7% may seem minimal, but that will add up to real savings in the years to come.

That savings will be washed away, however, if you're not planning on staying in the purchased home long enough to break even on the cost of the points. It also may not be valuable if you're planning on refinancing in the near future to a lower rate than what can be secured by tacking on the mortgage points. If neither scenario applies to you, however, this could be a smart way to reduce your mortgage rate now.

Explore your mortgage options here to learn more.

Adjustable-rate mortgages

In a healthier rate environment with more manageable mortgage rates, most experts would advise against taking out an adjustable-rate mortgage. But this isn't that environment. With rates as high as they currently are, buyers are understandably looking for any edge they can get — and adjustable-rate mortgages provide that extra bit.

Rates on adjustable-rate mortgages, otherwise known as ARMs, are generally lower when the borrower takes out the loan. They will adjust over time, however, and that adjustment is usually upward. So be cognizant of this before signing on the dotted line. That said, if that does happen, you could always refinance into a fixed-rate mortgage at that time. 

Crunch the numbers and see what works for you. A lower rate (and more manageable payments) now could be worth the possible refinance in the future.

The bottom line

Simply put: The mortgage rate environment is not particularly favorable when compared to what could have been secured just a few years ago. But with the unlikely prospect of sub-4% rates returning soon, buyers will either have to sit out the real estate market altogether or get creative. Both mortgage points and adjustable rate mortgages offer borrowers a better rate now, with an eye toward improvements in the future. They're not perfect options, and they both come with inherent risks, but if you're looking to get a lower mortgage rate in today's economy, they could be two of your best options.

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