How to avoid the trap of a high mortgage rate when buying a home

Your mortgage's interest rate is one of the "make or break" numbers that determines whether you become a happy homeowner or stay resigned to renting.  

If the only mortgages you can currently secure all have sky-high rates, don't despair – you have some workarounds that can help you nab a rate that's more reasonable for your long-term financial health. CNBC Select lists out some tips below that could help you close the deal on your home without becoming house poor.  

• Make a larger down payment
• Choose an adjustable rate loan
• Consider purchasing mortgage points
• Refinance when rates are lower
• Bottom line

Sure, making a larger down payment may mean you have to spend additional time rounding up extra cash upfront. But a larger down payment often means smaller monthly mortgage payments, assuming the same loan term. 

This smaller monthly payment can help your budget breathe a bit more and give you added flexibility for other life and home expenses. 

Saving a sizable down payment isn't easy, but putting any extra cash (bonuses from work, tax refunds, etc.) toward your down payment savings can help you make progress faster. It can also be helpful to keep your savings in a high-yield savings account, like the  UFB Secure Savings or the Marcus by Goldman Sachs High Yield Online Savings, so you can earn more for your balance.  

Of course, you likely won't earn hundreds of dollars in interest but even a couple of extra dollars each month can make a difference. 

Adjustable rate mortgages are a type of home loan that charges an interest rate that changes over time (usually after a period when the mortgage rate is fixed) based on market conditions. While the Federal Reserve doesn't set mortgage interest rates, factors like inflation and monetary policy can still indirectly influence mortgage rates. 

In a high-interest rate environment, adjustable rate mortgages will carry higher interest rates and in a low-interest rate environment, mortgage rates will likely drop. In theory this can be a good strategy to avoid locking yourself into a high mortgage rate (without having to refinance), but it comes with its fair share of uncertainty and risk. Nobody can predict how rates will rise and fall in the future, so there's a chance you could end up paying more in interest if rates continue to rise or plateau at a higher level than they're at now.  

Still, adjustable rate mortgages actually tend to become more popular for financing home purchases as interest rates rise. Just make sure your budget can withstand the blow if rates don't drop in the future. 

There are several lenders that offer adjustable rate loans. For instance, Chase Bank has both fixed-rate and adjustable-rate mortgages, in addition to a slew of other types of home loans. Ally Bank is another solid option for an adjustable rate mortgage, especially since this lender doesn't charge certain lender fees (like an origination fee). 

Again, we can't stress enough that you understand the inherent risks of an adjustable rate mortgage since the wrong move could cost you thousands. 

Purchasing mortgage points (also known as discount points) from your lender is another way to lower your mortgage's interest rate by paying extra money upfront. Buying mortgage points permanently lowers your mortgage rate and each point usually costs 1% of the loan amount. This results in a 0.25% rate reduction. Of course, costs can always vary based on your lender.  

So on a $500,000 loan, you'd have to pay an additional $5,000 for one mortgage point. A 0.25% rate reduction may not sound like a whole lot, but those savings add up over time. Plus, the rate reduction can help you spend just a little less on housing costs each month. 

Refinancing is a popular way to lower your monthly payment and save you cash over time. When you refinance, you're basically taking out a new home loan, often for the remaining amount you owe on the home (but not always). 

Ideally, your brand-new loan should come with better terms (after all, that's the point of refinancing). So if your original mortgage carried a high interest rate that became unaffordable, the goal with refinancing should be to secure a lower interest rate. However, your credit score must be in good shape in order to make sure you walk away with the best possible rate. 

Rocket Mortgage offers an Interest Rate Reduction Refinance Loan (IRRRL) loan that eligible borrowers can apply for if they're looking to lower their interest rate and potentially save on their monthly payments. Better.com also offers home loan refinancing but one huge draw is that this lender won't charge you prepayment penalties if you pay off the loan early. 

High interest rates can make getting a mortgage feel even more costly but the good news is that you don't have to be locked into that one high rate forever. Purchasing mortgage points, refinancing and even making a larger down payment are strong options for dealing with a high mortgage rate environment but always be sure to assess your personal situation before making a decision.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every mortgage review and guide is based on rigorous reporting by our team of expert writers and editors. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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