10 Ways to Overcome Soaring Mortgage Rates

If you were hoping to capitalize on 3% mortgage rates, you've missed your chance for now. With the Federal Reserve rapidly hiking interest rates, the market has responded accordingly, with investors demanding higher interest rates to hold mortgages.

According to Bankrate, the average mortgage rate nationally is now 5.73% for a 30-year fixed-rate loan, as high as it's been since 2008. That's helping to cool off the housing boom, and it's presenting a challenge for prospective homebuyers.

If you're looking to buy a home, here are 10 things you can do to beat the sting of rising mortgage rates.

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Most Americans get a fixed-rate mortgage when they buy a new home, with the 30-year-fixed being the most popular. But an adjustable-rate mortgage (ARM) could make more sense, especially in today's market.

According to Bankrate, the average rate for a 10/1 ARM, which is fixed for the first 10 years, is just 5.1%, and there are lower-interest options as well, depending on the length of the term. If you don't expect to be in the home for longer than 10 years, an ARM can be an especially good option.

ALSO READ: Is Now a Good Time To Get an Adjustable-Rate Mortgage?

Whether you get a fixed-rate mortgage or an adjustable-rate loan, if you want a lower interest rate, you'll likely get an opportunity in the future to refinance.

No one knows what will happen with mortgage rates in the future, but if a recession does hit, that would likely prompt the Fed to lower interest rates, bringing mortgage rates down as well. In fact, the Fed itself has projected lowering rates by 2024, indicating the central bank doesn't expect the high-interest-rate environment to last.

Refinancing is one option, but waiting to see whether conditions improve could also make sense in today's market.

Housing prognosticators see the market softening this year as rising mortgage rates, inflation, and a decline in consumer confidence have dampened demand. If the economy dips into a recession, there's a good chance the national housing market could see a full-on decline in prices. That, combined with a likely slide in mortgage rates under those conditions, would mean the environment for homebuyers could be significantly better in a year or two.

Buying in cash isn't an option for every homebuyer, but if you have money in the bank or another investment, such as stocks, it may be worth liquidating that to skip the mortgage process entirely.

Even if you don't have the means to buy in cash, you may want to consider looking for a cheaper home, so your down payment will go further, and your interest payment will be lower.

ALSO READ: Should You Buy a Home in Cash If You Can?

If you're set on buying a new home, one way to offset the increased interest costs is by renting out part of your home. You could buy a place with an accessory dwelling unit or a multi-family home or rent out a bedroom on a long-term or short-term basis through a platform like Airbnb.

If you live in an area that sees a lot of tourist traffic, an occasional short-term rental could go a long way to making a dent in those interest payments.

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One way to lower your mortgage rate is by paying money up front to your lender, known as buying discount points.

The cost of discount points varies per lender, but in general, you can expect to pay 1% of the loan amount to shave between an eighth and a quarter of a percent off the interest rate.

Depending on how much you're borrowing and what your monthly payments will be, buying discount points could be to your advantage.

Taking out a mortgage is one of the most important financial decisions you'll make in your life, so it makes sense to shop around. Even trimming an eighth of a percent off your interest rate can save you thousands of dollars over the lifetime of the loan.

Therefore, it's in your best interest to talk with different lenders. Some may give you a different rate based on your credit score, job or income history, or their own risk profile. You can also work with a mortgage broker who can shop around for you and find you the best rate at no charge to you.

ALSO READ: Current Mortgage Rates

One of the most important factors in determining mortgage rates from borrower to borrower is your credit score. So, if you want to save on your mortgage rate, one of the best things you can do is raise your credit score. Improving your credit score by 80 points, for example, could lower your interest rate by 0.4%, which could significantly impact your total payment.

If you're not in a rush to buy a home, taking the time to pay down any revolving debt, such as credit cards, and examine your credit report for ways to improve it could pay off over the long run.

The 30-year fixed-rate mortgage is the most popular home loan option in the U.S., as it generally gives you the lowest monthly payments available.

However, if you can afford higher monthly payments, you'll likely save money over the long run. That's because mortgages with shorter payback periods have lower rates. The 15-year mortgage rate is currently 4.89%, according to Bankrate -- nearly a full percentage point lower than the 30-year rate.

The same is usually true of five-year and 10-year adjustable rate mortgages, though you should keep in mind that a five-year rate will float sooner than a 10-year rate.

A mortgage typically comes with closing costs equivalent to 2% to 5% of the home's purchase price. Those costs include an appraisal, attorney fees, title insurance, and more.

However, there is an alternative to paying those closing costs. You can get a no-cost loan, meaning no closing costs, for a higher interest rate. In this case, the bank pays the closing costs in exchange for a higher interest rate.

While that might sound like a bad deal, if you don't keep the mortgage for 30 years -- and few borrowers do -- you could save money over the long term with a no-cost loan. A no-cost loan could work especially well if you hope to refinance in a few years.

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Inflation hit another 40-year-high in June, with the Consumer Price Index jumping 9.1%. But the good news for investors is that gas and commodity food prices fell in July, meaning there's a good chance that inflation peaked in June. While the Fed is expected to raise rates aggressively again in its meeting this week, the rate hikes could cool off later this year if inflation starts to ease.

Keep an eye on the inflation rate, as that is likely the best indicator of where mortgage rates and the housing market will go.

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