Rising Interest Rates and What You Can Do About It
Last month we talked about how an increase in lending rates affected the price of a mortgage. This month we will expand on that and how it affects the housing market and home costs, plus ways to reduce your mortgage rate. We are presently in a balanced market with a slight advantage for buyers. Homes are not flying off the market in days and one can protect themselves with contingencies unlike the last couple of years. First time buyers have not experienced a buyer friendly market, so this is a new phenomenon. Bidding and getting a home will almost feel uneventful and will cause some buyers to wonder if they overpaid. Some buyers will sit on the sidelines waiting to see where rates and housing prices go. What will happen is that buyers will truly get what they want and not take something just because they won the bidding war. It will cause buyers to really think about what features they want and seek them out. What a luxury! As rates increase, home pricing will typically plateau or normalize and possibly even decline. In 2021 home values increased 18%. That is not normal. A 6-7% yearly increase is more typical for the bay area. Once again, we need to readjust our expectations. Homes will be priced accordingly, and interest rates will be higher so fewer participants will be able to afford that home. Those buyers will then readjust their price range and so on and so on. More homes will be on the market and fewer buyer for each home will subsequently even out the market a bit. My suggestion is to wait for a few ore months and watch the market, get a feel for the new normal and buy when you find something that really fits the bill.
So now the interest rate is higher and it appears daunting, there are several things you can do to get the best rate possible. One reminder I always give my buyers is that we do not typically live in a home 30 years. Therefore, when you calculate the rate increase and overall costs it really is only applicable for 5-8 years. Plus, you could refinance if rates were to go down. Below are a few more ways to make the rate hike more palatable courtesy of Chase Bank. Remember, is still a good time to buy a home!
7 ways to reduce mortgage rates
Whether it's to make more money available for home renovations now or family trips down the road, reducing your mortgage rate
can be a great way to save money. Here are seven ways you may be able to decrease your rate and reduce mortgage payments, both at signing and during your loan term.
- Shop around
When looking for mortgages, be sure to contact several different lenders. Mortgage bankers, regional banks, national banks and local credit unions may all offer distinct loan products, each with their own rates and fees. Some lenders cater to new homeowners
, while others are better for refinancing
. Compare your choices carefully and take your personal situation into account when choosing a lender. Even if your real estate agent gives some suggestions, do your research to make sure you’re getting the right deal for your needs. Since loan rates can change frequently, you should contact different lenders on the same day and around the same time to truly compare rates. Also factor in any associated fees
when calculating the potential savings.
- Improve your credit score
Regardless of the loan you choose, you’re likely to get a better mortgage rate if you have a higher credit score
. Similar to making a bigger down payment on your mortgage, a high credit score can help you qualify for better rates and lower monthly payments.
To a lender, your credit score is indicative of your risk—the lower the score, the higher the risk. That's why lenders may charge higher interest rates to applicants with lower credit scores. If you apply for a loan and have a good credit score, you're more likely to be offered a low interest rate. However, if you already have a loan, it’s not too late to improve your credit score and qualify for better rates with a mortgage refinance.
To improve your credit score, first go over your credit report to see if you have any outstanding balances. Consider paying those and be sure to make your payments on time every month. Also look for and correct any errors on your credit report as these can negatively impact your credit. While a high credit score is ideal for mortgage approval, some affordable lending programs
do accept lower credit scores.
- Choose your loan term carefully
Short-term loans are less risky and, as a result, have lower mortgage rates. The trade-off for these kinds of loans are larger monthly payments since you're paying off the principal in a shorter time. With a longer-term loan, you spread the payments over a longer period of time, leading to lower monthly payments with a higher interest rate.
Short-term loans will generally save you more money in the long run, but long-term loans may leave you with more disposable income every month. If you're looking specifically for low mortgage interest rates and savings over the life of the loan, a short-term loan is your best bet.
- Make a larger down payment
Simply put, the more money you put down towards your mortgage
, the less you will owe on the loan. If you can make a larger down payment, you could have more equity in your home from the start. Not only will you need to repay less principal (the amount you owe on a loan excluding interest), but you’ll also pay less interest over the life of the loan since it is calculated on the principal owed.
While some loans have low down payment options, the ability to pay more can reduce mortgage rates and monthly payments. The smaller the down payment, the riskier lenders view your loan, and the higher the interest rate you may have to pay.
- Buy mortgage points
If you plan on owning your home for a long time, buying mortgage points
might be a clever way to save money. Paid at the time of closing, each mortgage point has a value equal to 1 percent of your mortgage. In exchange for these upfront payments, the interest rate is reduced and monthly mortgage payments are smaller. Keep in mind, however, the time it will take to recoup your savings. Known as the break-even point, this is the length of time in months it will take for your total savings to add up to the cost of the points. If this time is longer than you plan to own the home, mortgage points may not be worth it for you.
- Rate locks
To potentially reduce the impact of mortgage rate changes before you close on a home loan, consider locking in your interest rate. A rate lock
avoids increased rates before closing on your mortgage. You may need to pay a fee to lock in a rate, but this could be worth it if you suspect rates may change.
Keep in mind that, while a rate lock protects you from higher mortgage rates, it also rules out lower rates. Talk to your lender about rate locks with float down provisions. The float down feature gives you a one-time opportunity to lower your locked-in rate to current market rates. There may be additional fees for this option.
- Refinance your mortgage
Renegotiating the terms of your mortgage can save you money over the loan’s course. There are a variety of refinancing options
available, each with their own pros and cons. Here are some refinancing options and ways they can save you money on your mortgage rate.
- If you're concerned about an impending increase in your adjustable-rate mortgage (ARM), consider refinancing your loan to a fixed-rate mortgage. This allows you to make consistent monthly principal and interest payments.
- You may also be able to change your existing ARM to another ARM with different terms. The Federal Reserve Board recommends looking at ARMs with low interest-rate caps. These limits prevent your mortgage payments from increasing past a certain amount.
- If you're in a better financial situation than you were when you first signed your loan, you could potentially negotiate your fixed-rate mortgage to a lower interest rate. This option is particularly feasible for people whose credit scores have increased or if rates have decreased. When refinancing a fixed-rate mortgage, you may also be able to renegotiate the length of your loan to better suit your needs.