Here are four easy methods to deal with rising interest rates.
“I want to purchase a home, but how can I deal with higher interest rates?” Many clients have reached out to ask me this question recently. In case you don’t know, the Federal Reserve recently raised rates by 75 basis points—the largest increase since 1994. Rates are still low historically, but there’s no denying that recent increases make it more difficult to purchase a home. If you’re looking to buy, what can you do?
Fortunately, there are tons of creative ways to adjust your strategy and prepare for higher rates. I want to share three of them with you today:
1. Pay off debt to improve your credit. You may think your credit score is already as good as it can be, but there is always room for improvement. Start by paying off your debt little by little. This will lower your debt-to-income ratio, which is what lenders use to determine your creditworthiness. The better your score, the better rate you’ll get from your lender.
2. If you have a good rate, lock it in. If your lender is offering you a good rate, consider locking it in. Rates are expected to continue rising to combat inflation, but you won’t have to worry about that if your rate is locked in. Just remember it makes sense to lock in your rate when you’re almost to closing, as most rates only stay locked in for one to two months. Also, if your lender offers you an extended-rate lock on a new-construction home for a year, you could consider this option.
“The longer you wait, the more expensive homes will become.”
3. Buy discount points to lower the interest. Discount points, also known as “mortgage points,” are fees you can pay to lower your interest rate. One point typically costs 1% of your loan, so a point on a $200,000 mortgage would cost $2,000. A nice perk of mortgage points is that they might be tax-deductible. If you can deduct your mortgage interest, chances are you can deduct the cost of your mortgage points as well.
4. Consider an adjustable-rate mortgage (ARM). ARMs have received a bad reputation due to what happened in the 2008 market crash, but new regulations make them a much safer option. Plus, they offer a lower initial rate, so you’ll be able to afford more. Just remember that these rates are only fixed for a certain amount of time.
Even though we’re in a rising rate environment, there are still plenty of opportunities in our market. If you have any questions about interest rates or purchasing a home, please call or email me. I am always willing to help!
