Ways to Deal With Rising Interest Rates

Interest rates have been going up for the last few months along with increased housing prices.  You’ve heard  the bad news.   What you’d probably rather hear is that rates and house prices will come down in the near future. Maybe you should just hold on a little while and your waiting will pay off. Unfortunately, it’s looking like rates could go up even more in the near future if you believe the Fed will stick to their proposed schedule of rate hikes, and house prices aren’t looking like they’ll definitely take a dramatic tumble.

So let’s look at some ways you can deal with rising interest rates to make your payments as manageable as possible, and maybe even save some money.

One of the ways to deal with rising interest rates is to is to improve your credit score.  The better your credit is, the better your rate will be. Take a look at your credit report and see if there’s anything glaringly wrong that you can have corrected. Mistakes do happen on credit scores.  If all the gobbledy-gook on your credit score looks foreign to you, ask your mortgage rep to take a look and give you advice on anything they see that you can get corrected, paid off, or paid down in order to raise your credit score.  DO NOT HIRE SOMEONE TO DO THIS FOR YOU.  A  good lender can help you with this for free. (Please ask me for a few names of my favorite lenders.)  Even if this takes a few months, it is worth the wait as you will see the results in a higher credit score, a lower interest rate and more purchase capacity.

Check with several lenders and see who offers you the best rate. Or go through a mortgage broker who has access to many lenders and can do the shopping for you. Be careful if one sounds way too good to be true; they could be quoting you a much better rate, but beware of the fees. If you have access to a credit union or a smaller local bank that knows you, make sure to check with them—they often have better rates because they lend their own money and / or have a closer relationship with their customers.  If you go with a credit union make sure they are able to close on your time line.  Some credit unions like the World Bank/IMF and State Department credit unions are very responsive.  As an FYI, many listing agents will react badly if you plan to finance your purchase through Navy Federal Credit Union or USAA, based on their closing record.  (Don’t tell them I said so!)

Consider buying down your mortgage rate by paying “discount points.” These are fees you pay up front in order to get a lower mortgage  rate. Buying a point will cost you 1% of your home loan and will generally buy your rate down by a quarter percent, although that can vary from lender to lender. Most will have a cap on how many points you can buy, and they also may offer you the option of buying lower increments than a full point. This is a good option if you plan on staying in the house for some time. Make sure to weigh how much it’ll cost you, and how long it’ll take to break even and then reap the benefits in terms of savings.  While discount points will increase your closing costs, we may be able to ask the seller to pay part of your closing costs.  As the market starts to stabilize we will see more sellers willing do make such concessions.

Even though rates have already been on the rise, there’s a good chance they’ll go up even more according to recent statements by the Federal Reserve. Rate locks are typically only offered for up to 60 days, so if you’re serious about buying soon, consider locking in at the current rate. Make sure to ask your lender how much a rate lock will cost you, if anything. Also find out if they offer a “float down” option, which will allow you to get a lower rate than you locked in at, if the rates do happen to come down before you close on your house.  Many lenders offer the option to float down at least once.  Make sure your lender is one of those good guys!

Rates have been so low for so long that there hasn’t been much demand for adjustable rate mortgages.  The 30-year fixed-rate mortgage was just so affordable that no one considered an ARM. But now people are trying to save money however they can on their rate and adjustable rate loans are making a comeback. These typically afford you a better interest rate at a fixed rate going into your mortgage, but only for a certain number of years before they adjust (as the name suggests). They could adjust up or down, depending upon what rates are when the time comes. To be safe, plan on the worst-case scenario of the rate being higher when that day comes. The length of time you have before the rate adjusts is often 5, 7, 10, or 15 years. These are perfect if you’re not thinking about staying in the house for a full 30 years. So, consider how long you plan on staying in your house, and opt for one that won’t adjust before you move so you won’t be affected by a rate adjustment at all. For instance, if you’re pretty sure you’ll move in the next decade, a 10-year ARM might be the way to go.  In addition when interest rates go down again you can refinance into a 30 year (or 15 year) fixed mortgage.

Keep an eye on mortgage rates. When they come down a percent or two, refinance your mortgage at a lower rate.  Face it.  The higher interest rates are going to slow the recent sales price increases, saving you money on the purchase price.  Then when rates come down, you can refinance to a lower rate and still enjoy the lower purchase price.

By paying half of your monthly mortgage payment once every two weeks, you end up making an extra payment per year. Doing this cuts years and lots of interest off of your loan.

So, even if rates aren’t as low as they were in the recent past, you still have some options and control over how much interest you have to pay. Use one, or a mix of the strategies above, and you’re bound to save money!