How to Get a 6% Mortgage Even Before the Fed Cuts Rates
Falling mortgage rates could help home buyers in two ways this year: Houses might become slightly more affordable , and there might finally be more listings to choose from.
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Mortgage rates aren’t generally expected to drop below 6% in 2024, though they are likely to decline gradually as the Federal Reserve starts making interest-rate cuts. The Fed held interest rates steady Wednesday , but some economists say cuts could begin this spring.
The Fed’s moves don’t have an impact on mortgage rates directly, but rate cuts usually lower the yield on the 10-year Treasury, which is an indicator lenders look to when setting mortgage rates.
Home buyers don’t need to wait for the Fed to cut interest rates to get a 6% mortgage. The average 30-year fixed-rate mortgage has already dropped to 6.63% as of Feb. 1, according to Freddie Mac . That puts 6% in striking distance for some buyers, depending on their credit score and other factors. There are also additional steps to take for further discounts on the rate.
Lawrence Yun, chief economist at the National Association of Realtors, expects mortgage rates near 6.5% for the rest of the year. Chen Zhao, an economist at Redfin, sees rates in the low 6s by around December. That would still be on the high end for the past two decades.
Last fall, the average rate of the 30-year fixed-rate mortgage pushed close to 8%. Rates falling below 6% would have a big mental effect on buyers and sellers, Zhao said.
“The psychological barrier for some sellers is starting to come down, and buyers may not feel like they’re staring into the abyss like they did last year,” Zhao said.
A $400,000 home with 20% down and a 6.93% 30-year fixed mortgage would translate to a roughly $2,113 monthly mortgage payment, said Ted Rossman, a consumer-spending analyst at Bankrate. If rates drop to around 6.18%, that monthly payment falls by about $158.
The median existing-home sale price was $382,600 in December, according to the National Association of Realtors. Potential sellers who were reluctant to part with an ultralow mortgage might be more willing to put up a for-sale sign once rates fall enough, Zhao said.
Higher mortgage rates and an unwillingness of many homeowners to sell made 2023 the worst year for home sales in decades. Existing-home sales slid 19% in 2023 from the prior year to 4.09 million, the National Association of Realtors said recently. That total was lower than during the subprime crisis and the lowest full-year level since 1995.
Here’s what home buyers should consider when shopping for a mortgage this spring.
Boost your credit score
Increasing your credit score , even by a small amount, can help you reduce the cost of buying a home.
A difference of a few points can sometimes mean lower mortgage rates that save buyers thousands of dollars over time.
For example, a homeowner with a credit score of 760 or better and a roughly 6.33% mortgage rate would pay about $123 less a month for a $300,000 mortgage than someone with a credit score between 660 and 679 who gets about a 6.95% mortgage rate, according to a Bankrate analysis of recent FICO data. That adds up to roughly $44,280 in savings over the 30-year term of the mortgage, said Rossman, at Bankrate.
Check your credit reports for free at AnnualCreditReport.com and have any errors removed. Ask the credit bureaus to correct any mistakes; doing so might boost your score. Two other ways to raise your score are to make midmonth payments or lower your credit-utilization ratio. Spend less than 30% of the amount of credit offered to you on all your cards (the lower the better), and pay off your balance each month in full. If you really want to maximize your score, it helps to make an extra payment or two during the month to knock your statement balance down before it even comes out, Rossman said.
Use points
Buyers can also use mortgage points to lower their interest rate, if getting to 6%, or under 6%, is important to them. Each point reflects 1% of the loan amount and might be paid up front to your lender.
One point on a $300,000 loan would cost $3,000. Each point lowers the interest rate by a quarter percentage point for the life of the loan. Think about whether you will refinance in the next five years or so if you are considering buying points.
Some sellers and home builders are offering to help lower a buyer’s mortgage interest rate for a certain period, a move known as a rate buy-down. A seller could also offer to buy down a mortgage rate permanently to entice a potential buyer. The permanent version of a rate buy-down involves buying mortgage points at closing, Rossman said.
Your bank may offer a discount on the rate
Many home buyers assume they have to accept the first mortgage rate offer they receive, financial advisers said. It pays to shop around, and to take advantage of existing financial relationships.
The primary bank where you have your checking, savings and investments may be able to offer you discounts based on your relationship, said Emily Irwin, senior director of advice for Wells Fargo.
These discounts can range from a quarter to a full percentage point, she said.
Some banks require high account minimums (often $200,000 or more) in order to get what is can be a paltry discount, said Bankrate’s Rossman. So it is usually best to still cast a wide net in your mortgage search.
Borrowers who applied with two different lenders reduced their mortgage rate by an average of 0.10 percentage point, according to research from Freddie Mac that examined purchases between 2010 and 2021.
Focus on the lender’s entire package—lender fees, other closing costs and interest rate. Another lender might offer a better deal than your bank when you take all of those costs into account, said Holden Lewis, home and mortgage specialist at NerdWallet.
Write to Veronica Dagher at Veronica.Dagher@wsj.com
