Friday, September 4, 2015

6 Ways to Fight Rising Interest Rates

Mortgage interest rates have been hovering between 3.5 and 4 percent for the past 18 months, refusing to rise as quickly as many forecasters had predicted. That means many have been able to lock down favorable rates without the threat of a drastic increase hanging over their heads.

However, later this year, the Federal Reserve is expected to raise its benchmark rate, which has held near zero since December 2008. This can happen as soon as its next policy meeting in mid-September or, more likely, in December.

The long awaited increase is a good sign for the economy as a whole; it’s continuing to expand at a moderate pace, driving solid job gains and declining unemployment. For real estate markets, though, the news isn’t so great.

Likely, the rate hike will be enough to drive rates on 30-year fixed mortgages to well over 4 percent and perhaps closer to 5. With this hike looming, now is a good time for buyers and refinancers to consider their options. These include:

1. Adjustable Rate Mortgages (ARMs). ARMs are a great way to keep rising rates from busting your budget, at least for the first five years of the loan, when you pay little or no interest. When it resets, you can take sell or take your chances on a refi if you have enough equity. ARMs are a good idea if you don’t plan to own the house a long time.

2. Fix up Your FICO. When they get loan terms from their lender, many buyers wonder what happed to the super low teaser rates their lender promised in its advertisements. Those “bait” rates are real, but they’re just not available to everyone—just those with fantastic FICOs and moderate-sized loans.

Lower FICO scores translate into higher risk for lenders and their investors, so they raise rates to compensate for the risk. By working hard to improve your credit score—reviewing your history, paying bills on time, avoiding taking too much credit, keeping credit card balances down—you can raise your FICO and lower the interest rate on your mortgage.

3. Increase Your Down Payment. By increasing your down payment, you fight rising rates two ways. First, you reduce the amount you will have to borrow and, in turn, the amount of interest you will have to pay. With a smaller loan you may also get a lower interest rate; smaller loans reduce lenders’ risk and a lower rate can result.

4. Lock Your Best Rate. Rates change every day and they vary slightly by location. You can improve your chances of getting the best possible rate during the time that passes between your loan approval and closing by asking your lender for the right lock your rate, usually within a 30 day period. Follow mortgage rates as closely as you can and time your lock to coincide with a low point.

5. Buy a Cheaper House. If the house costs less, your loan is going to be smaller. With a less expensive house, you may also be able to put more down, reducing your principal even more. With a smaller loan, you should also realize a lower rate.

6. Shop for Rates. Lenders compete aggressively by the rates they offer. Like any business, some will offer more favorable rates than others to bring in more business. Also, lenders with access to capital at lower cost can afford to charge lower rates. Shop around for the best rates by sharing your FICO score with the lender so that they don’t quote you a “bait” rate you will never see.