Home loan options with lower mortgage rates in 2024

Lower rates are out there if you know where to look

In September 2022, the average 30-year mortgage rate hit 6.70% according to Freddie Mac. One year earlier, it was just 2.9 percent. That represents a big difference in home-buying budgets and mortgage payments.

The good news is that there are a variety of ways you can beat rising mortgage rates. And it starts with choosing the right mortgage program.

Many home buyers don’t realize that their loan type has a big impact on their interest rate; choose the right one, and you could see serious savings or even increase your price range. Here’s how.

In this article (Skip to...)

• Paying points
• Rate buy-downs
• Adjustable-rate loans
• Short-term loans
• Interest-only loans

1. Paying points for a lower mortgage rate

There’s nothing new about discount points (a.k.a. “mortgage points” or just “points”). With these, you pay extra at closing to buy yourself a lower mortgage rate. One discount point costs 1% of the loan amount and typically lowers your interest rate by 25 basis points (0.25%). So on a $300,000 mortgage, one point might cost $3,000 and drop your rate from 6.5% to 6.25 percent.

You can typically buy mortgage points in different increments, letting you choose how much you want to pay upfront and how much you’ll drop your rate. For example, on a $300,000 mortgage, discount options might include:

*Each lender prices discount points and interest rates differently. These numbers are for example purposes only. Your own fee and rate reduction could be different.

Benefits of paying discount points

At the time of this writing (Oct. 2022), the mortgage market was far from normal. Some lenders were offering noticeably bigger rate cuts for each discount point than they usually would. So it could be an especially good time to explore this option.

Of course, buying discount points is only an option if you can afford the additional cost. Points will be added to your upfront closing costs, so you need to be sure you have enough cash on hand after your down payment and loan fees are accounted for.

Risks of paying discount points

When deciding whether discount points are worth it, consider how long you plan to stay in the home. Paying points usually makes sense if you’ll stay in the home for many years, giving you time to recoup the extra cost and see “real” savings on your home loan.

It’s up to each lender to decide how much discount points cost and how much they’ll lower your rate, so it’s important to shop around and compare offers before you choose a loan. Make sure each loan offer you receive includes the same number of discount points to ensure you’re comparing rates on equal footing.

2. Temporary rate “buy-downs”

A temporary mortgage rate buy-down can substantially reduce your mortgage interest rate for the first year or few years of your loan. Unlike discount points, which drop your rate by a small amount for the life of the loan, buy-downs drop your rate by a large amount (often 1-2%) for only a short time.

Another big difference is that the home buyer pays for discount points whereas another party has to pay for a temporary rate buy-down.

Any interested party can fund a buy-down. Developers might offer them for new-build homes. In a buyers’ market, a seller might pay for a rate buy-down rather than accept a lower price. Even real estate agents have been known to provide this sort of help. What’s new is that lenders are starting to offer this assistance, too.

Benefits of a rate buy-down

Mortgage rate buy-downs have been rare until recently. But they are growing in popularity in the current market. For example, in September 2022, Rocket Mortgage introduced its Inflation Buster program. It offers a one-year rate reduction of 1 percent. And other lenders are beginning to come up with similar offers.

Rocket explains that its “lower rate is accomplished through a special escrow account established and fully funded by Rocket Mortgage. During the first 12 months, the homeowner will make the reduced mortgage payment and Rocket Mortgage will cover the difference automatically.” If your new mortgage rate was 7%, for example, you’d pay only 6% for the first year. Rocket estimates that could save you $164 a month (nearly $2,000 over the year) on a $250,000, 30-year, fixed-rate mortgage (FRM).

How good a deal is offered will depend on how incentivized the person offering the buy-down is. Multiyear arrangements that reduce the rate by more than one percentage point aren’t common but wouldn’t be unprecedented.

Risks of a rate buy-down

There’s an obvious downside to temporary rate buy-downs: All good things come to an end. One day, your rate will increase and your mortgage payment will rise along with it. As with an adjustable-rate mortgage, it’s a good idea to keep an eye on rate movements and look for an opportunity to refinance into a lower fixed rate if they fall.

Lenders typically require you to qualify based on the full, undiscounted rate and payment. So, provided your financial circumstances haven’t changed drastically, you should be able to cope when the rate adjusts. But those higher payments can still come as an unwelcome change when you’ve gotten used to the extra cash flow.

In addition, if your financial situation has changed by the time your interest rate increases — maybe due to a job change, income loss, or new debt — you could find your new mortgage payment unaffordable. These are real risks, so consider them carefully before opting for a rate buy-down program.

3. Adjustable-rate mortgages

An adjustable-rate mortgage comes with a low introductory rate for the first three to 10 years, after which your mortgage rate and payment can adjust once per year. These loans may be risky for long-term homeowners. But for the right person, they can be a great way to save money when fixed interest rates are high.

Benefits of an ARM

ARMs tend to be more popular in a rising-rate environment. There are two big reasons for this:

1. Introductory ARM rates are almost always lower than fixed mortgage rates. This provides a lower mortgage payment and potentially a bigger home-buying budget at the outset
2. You can fix your ARM rate for an initial period: often three, five, seven, or 10 years. If you move out or refinance the loan before that fixed-rate period ends, you never have to worry about your ARM rate rising

Some people are close to certain they’ll be moving again within five, seven, or 10 years; maybe for work, a growing family, elderly parents moving in, or any number of other reasons. These buyers stand to benefit from the low initial cost of an ARM and, provided they move according to plan, the risk of adjusting to a higher rate is low.

Note that shorter fixed-rate periods usually equate to lower rates. So a 3/1 ARM should have the lowest intro rate, followed by a 5/1 and 7/1 ARM. Introductory rates on a 10/1 ARM are likely to be the highest option.

Risks of an ARM

If you’re buying a forever home, you may not want an ARM. It’s possible for ARM rates to increase or decrease when they reset. But, in general, ARMs are far more likely to adjust higher than lower. So if you keep your ARM loan beyond its fixed-rate period, it’s likely you’ll see increased mortgage payments later on.

In addition, at the time this was written, the Federal Reserve was raising its interest rates aggressively. Unlike fixed mortgage rates, adjustable mortgage rates are directly tied to industry benchmarks. So higher Fed rates could force your ARM rate to jump once it resets.

Be sure to carefully consider your long-term plans and talk to your loan officer about the pros and cons of an ARM before opting for this type of home loan.

4. Short-term mortgages

If you want a lower monthly mortgage payment, a shorter-term home loan won’t be right for you. But if your ultimate goal is to drop your rate and save on total interest, choosing a mortgage term of fewer than 30 years could be a great idea.

The shorter your loan term is, the lower your interest rate will be (all other things being equal). You can easily find fixed-rate mortgages that last 10, 15, or 20 years instead of the usual 30. And some lenders allow you to pick pretty much any length you like below 30 years.

Benefits of a shorter loan term

A shorter-term loan pretty much always comes with a lower mortgage rate. For example, on the day this article was written, The Mortgage Reports’ daily survey put average 30-year fixed rates at 7.197% (7.233% APR). But 15-year fixed rates came in at just 6.392% (6.423% APR). That’s a significant rate drop and would save you thousands on mortgage interest in the long term.

Meanwhile, you’ll build home equity a lot faster using a 15-year mortgage and you’ll pay off your house in half the time.

Risks of a shorter loan term

For someone with stable finances and reliable cash flow, there aren’t any real risks to a shorter-term loan. As long as you can afford the higher monthly payments, you’ll enjoy a lower mortgage rate and save a lot of money in the long run.

The only danger comes if your financial life is suddenly turned upside down. For instance, a job loss or reduction in income could put your mortgage in jeopardy. So make sure you’re absolutely comfortable with the payment on a 10-, 15-, or 20-year loan and that your financial outlook is strong before signing on.

5. Interest-only mortgages

An interest-only mortgage doesn’t typically come with a lower mortgage rate. But it does come with a lower monthly payment — for a while.

In today’s high-rate environment, some lenders might advertise interest-only loans as a way to save on mortgage payments. That can sound appealing when rates are rising. But these loans are risky, and for the majority of homeowners, another loan type will work better.

How interest-only mortgages work

Normally, your monthly mortgage payment has two parts: principal (which pays down the loan balance) and interest. Almost all mortgage loans are “fully amortized,” meaning that if you make all your monthly payments, the loan will be paid off by its end date.

As the name implies, an interest-only mortgage involves paying only interest and no principal for a set period of time (say, the first five years). This can lower your monthly mortgage payment at the outset.

Risks of an interest-only mortgage

The big downside of an interest-only mortgage is that, after the interest-only period, your payments will increase substantially. And you won’t have paid off any of your loan balance or built any equity in the home.

If your interest-only period lasts five years, for example, you still owe the whole amount borrowed after year five. But you have to pay it off, with interest, over 25 years rather than 30. So your monthly payment will shoot up.

As the Consumer Financial Protection Bureau warns: “Don't assume you’ll be able to sell your home or refinance your loan if your payment increases. The value of your property could decline or your financial condition could change. If you can’t afford the higher payments on today’s income, consider another loan.”

Is an interest-only mortgage ever a good idea?

The New York Times explains that “These loans are largely used by more affluent homeowners to manage their cash flow, giving them the flexibility to pay down principal when they receive cash from a bonus or a commission, for example.” If you think an interest-only mortgage could be right for you, discuss it with your mortgage loan officer. For most homebuyers, though, another type of mortgage will be a safer choice.

Find the best loan program for you

A 30-year, fixed-rate mortgage is a great choice for many home buyers — but it’s not the only option. With mortgage rates increasing, it’s more important than ever to compare loan programs and find the best deal for your situation.

Be sure to ask your loan officer about programs that could offer lower interest rates in today’s market. They’ll help assess your financial situation and choose the most affordable type of home loan for you.