Owning a home may be closer than you think
What a ride it’s been over the last few years for first-time homebuyers. In 2021, the demand for homes went higher and higher as seemingly everyone was looking to take advantage of low interest mortgage rates. This drove the price of the homes for sale higher in response to this greater demand.
Now, home prices have slowed their upward growth somewhat, as high mortgage rates have cooled demand. But those home prices are still elevated from where they were just a few years ago.
According to the National Association of Realtors, the median sales price of existing single-family homes in the United States was $300,200 in 2020. In March of 2024, the median home price in the United States rose to $393,500—a 31% increase.
For many people, a mortgage is the biggest financial commitment they will make in their lifetime. However, there are ways to save on your mortgage and make homeownership more attainable. Some are strategies that can help you save money over the life of your mortgage, and some are loan products and options that you should talk to a loan officer about.
By taking advantage of these options, you can achieve your goal of owning your own home without breaking the bank.
Save on the first few years of your mortgage
There are loan programs that will help you save during the first few years of your mortgage. This is a great way to ease into homeownership. They also work well if you think that you will earn more money in the next few years, therefore you’ll be able to pay more towards your mortgage once you start cashing those bigger paychecks.
Here are a couple of loan options that you can consider that allow you to pay less during the first few years of your loan.
Adjustable Rate Mortgages
Adjustable-rate mortgages, normally called ARMs, are a type of loan that gives you the opportunity to pay lower monthly payments at the beginning of the loan. ARMs offer an initial fixed-rate period (usually for five, seven or 10 years) featuring a low introductory rate. This initial fixed-rate period is followed by a variable-rate period for the remainder of the loan. That means that your mortgage rate will be readjusted every 6-months or each year.
ARMs can be an attractive option for those looking to save during the first few years of homeownership. They can be an excellent option for those who don’t plan on staying in their home for longer than five to 10 years. And you could refinance from an ARM to a fixed-rate mortgage if rates improve.
RateReduce
RateReduce is a temporary buydown program, which reduces your interest rate on your mortgage with the help of the seller or builder. Whoever you’re buying from has to offer to contribute to your loan to lower the rate. This lower rate may be in effect during the first few years of the mortgage or for the life of the loan. It is considered a seller’s concession and is a great benefit for first-time homebuyers to request.
There are three different types of buydowns that are part of RateReduce*:
- RateReduce Temp
- RateReduce Perm
- RateReduce Sell
RateReduce Temp reduces your mortgage rate for the first few years of your loan. We offer five types—the most common is called a 2-1 buydown, but there’s also a 3-2-1 buydown, 1-1-1 buydown, 1-0 buydown and 1.5-0.5 buydown.
Their names indicate how they work—a 3-2-1 Buydown offers a 3% lower rate for 1 year, a 2% lower rate in the second year and a 1% lower rate in the third year before the rest of the mortgage reverts to its original rate, and so on.
As you could guess, the RateReduce Perm is a more “permanent” version of buydown that will keep mortgage rates down over the entire term of the loan. RateReduce Sell is similar, but designed to help sellers market their homes.
First-time Homebuyer programs
There are many programs designed to help first-time homebuyers realize their dreams of homeownership. These include down payment assistance programs, helping first timers with what can be one of the most significant obstacle to homeownership, the initial down payment.
FirstHome Plus
FirstHome Plus is a loan program that eliminates some loan terms and upfront fees for first-time homebuyers based on their income level. Eligible households that are at or below 100% Area Media Income (AMI) in many areas of the United States, and up to 120% AMI in high-cost areas can qualify. For instance, the AMI for the Chicago area is $105,700. So, a household could make up to $126,840 (120% of AMI) and still qualify for this program.
The savings can be significant, depending on your eligibility, with some borrowers qualifying for over a full percentage point reduction in their mortgage rate.***
Paying more now to pay less long-term
If you can afford to spend a little bit more right now, you may be able to realize some savings over the life of your loan.
Paying points
This is also known as buying down the rate, where you pay your lender extra money up front, and they will reduce your mortgage’s interest rate. When you close your loan, you have the option to buy mortgage points from your lender. One point generally will cost you 1% of your total loan amount. For every point you purchase, your lender will lower your mortgage rate by a certain percentage point—usually one-quarter of a percentage point.
Over the course of your loan, you could potentially save tens of thousands by paying for points when you get your mortgage. It just costs you a bit more at closing.
You can use our mortgage points calculator to find out how much you would save over the life of the loan when you buy points.
Shorter-term loans
A shorter-term mortgage, for example a 15-year mortgage instead of a 30-year mortgage, lets you pay less interest over the course of the mortgage as well. But instead of paying more at closing, shorter terms mortgages ask you to pay more each month.
A 15-year mortgage usually offers you a lower rate than a 30-year mortgage. But because you pay off the loan in a shorter amount of time, your monthly responsibility is greater. There are other benefits to a short term mortgage, but perhaps the biggest is the amount you’ll save by paying interest for 15 years instead of 30 years.
Additional money-saving strategies
There are some simple things you can do that will help you pay less over the life of your mortgage. While these may seem small, they add up.
Make additional payments
If possible, when you make larger mortgage payments each month or make extra payments whenever you can. This will help you to pay down your principle faster and save on interest charges.
Make biweekly payments
Instead of paying your monthly mortgage payment at the end of the month, you can split that payment in half and make a payment every two weeks. This allows you to use the calendar to your advantage. You’ll end up making 26 total payments, instead of 12, which is like making an extra month’s payment each year. You’ll be paying down the principle quicker and paying less interest with this strategy.
Look for refinance opportunities
Keep an eye on mortgage rates, and when they become lower than your current mortgage rate, you can consider refinancing. Refinancing can incur lending fees, so a good rule of thumb is to wait to refinance until you can secure a rate that’s at least 0.5% lower than the rate you have.
Being money-smart with your mortgage
With rising rates, and historically high home prices, you should look for any way to save on your mortgage that you can. As you can see, there are many opportunities to do that in a variety of ways. The best way to pursue any of these affordability hacks is to talk to a loan officer about them. Some may work better for you than others.
* Both temporary and permanent RateReduce options are available from participating builders and sellers on select properties. The 1.5/.5 temporary buydown option is not available for VA loans.
Sellers may sign a RateReduce Sell Agreement with Rate to secure a 60-day rate lock on seller's departing residence by paying an upfront fee (higher fee for high balance loans): rate will be locked for 60 days; giving the seller 30 days to secure a buyer and the buyer 30 days to close the loan. Seller is required to contribute seller-paid points which must be applied towards a permanent rate buy down only. The seller must make a minimum buydown contribution of 2% and could elect up to a 9% buydown contribution subject to applicable state and federal laws, product guidelines, and future product eligibility if changes occur prior to closing. Upfront lock fee may be refundable if the buyer's loan closes. If the lock expires, is cancelled, or if the borrower withdraws and a new borrower is not found within the lock time parameters, then the upfront fee will not be refunded to the seller. Eligible for fixed rate, purchase transactions only. Seller must acquire a binding purchase contract for departing residence. Minimum FICO score and down payment requirements apply. Applicants subject to credit and underwriting approval. Buyer's interest rate may be higher depending on their qualifying information. Additional restrictions apply.
**At least one borrower must be a first-time homebuyer, live in an eligible Metropolitan Statistical Area (MSA) and meet product eligibility requirements to qualify. Talk to a loan officer to find out if you qualify for this program.
***At least one borrower must be a first-time homebuyer with total qualifying income 100% or less of the MSA where the property is located and 120% or less if the property is located in a high balance county. Must be <100% of the AMI for non-high-cost areas and <120% of the AMI for high-cost areas (defined as areas where loan limits exceed standard conforming loan limits). Must meet income threshold based on the Metropolitan Statistical Area (MSA). Talk to your loan officer to find out if you qualify for the rate reduction.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
Savings, if any, vary based on the consumer’s credit profile, interest rate availability, and other factors. Contact Rate for current rates. Restrictions apply.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
