When you get a mortgage, you DO have some control over your interest rate.
One way to get a better rate is through a rate buydown, which can lower your monthly payments.
The easiest way to buy down your mortgage rate is buying discount points. Each point is 1.0 percent of your mortgage amount, and reduces your mortgage rate by 0.25 percent. For example, if you are offered a 6 percent interest rate on a $100,000 loan, you can pay one point ($1,000) to get a 5.75 percent interest rate instead. You can buy down your interest rate by up to 1.0 percent to reduce your interest costs and get a lower payment.
Before you choose to complete a rate buydown, make sure you take the time to compare your monthly savings with how long you plan to own the home. How many months will it take to break even? The longer you stay in the home, the more a rate buydown will pay off.
Sometimes you can roll the cost of discount points into your home loan, but this can defeat the purpose of the points by reducing your savings and changing your loan-to-value ratio, which may make other costs go up.
Doing a rate buydown is usually a better option than an adjustable-rate mortgage that allows for negative amortization, like an option ARM, if you will be in the home for many years. Your monthly mortgage payment will always include some amount of interest and principal.
You may choose a 3-2-1 rate buydown, which is a 30-year home loan with an interest rate that increases 1.0 percent per year for the first three years. After that, your interest rate will remain the same. The advantage of this option is you will not begin paying the high payment in the beginning. Your payments will be kept low for 36 months, and this can be a good option if you expect your income to go up.
You can also request a 2-1 buydown option, which gives you a 30-year mortgage with a rate that goes up 1 percent every year, for the first two years.