What can buyers do to combat rising interest rates?

In the last quarter, we saw the most favored interest rates go from 3.5% to 4.5%. While these rates are historically among the lowest in decades, it may not make you feel better about paying more for your first or next home.

This week’s rate is the highest we’ve seen in two and a half years. Loan officers predict further rate hikes as the Federal Reserve (the “Fed”) attempts to control inflation. Basic economics tells us that more expensive credit slows spending, which, in turn, lowers prices. It can be difficult to walk between inflation, control and recession.

People looking for a conventional loan of $647,200 or less with a 20% down payment will likely receive the best 30-year fixed rate if they are employed and have a credit score above 740.

Using the example of a typical $750,000 DC townhouse with a $150,000 down payment, the difference between the principal and interest payment at 3.5% and 4.5% is $346 per months without taking into account tax-deductible mortgage interest.

Often there is a rate premium paid for buying a condominium or co-op apartment, for being self-employed, for less than stellar credit, and for lower down payments or larger loans.

So what can you do to minimize the effects of rising interest rates?

First, make sure your credit is spotless. Consult a loan officer for a copy of your tri-merged (Equifax, Experian and Trans Union) credit report to avoid any surprises. Don’t start paying off your debts or closing your credit cards without your loan officer’s advice. There is good credit debt.

Shop around for your mortgage and consider alternative mortgage programs. For example, as rates rise, adjustable mortgages with fixed payments over 5, 7 or 10 years may be more affordable. A 30-year fixed rate, often considered the safest bet, may not be as desirable if you’re not keeping the house for 30 years.

Research any special benefits you may be entitled to. DC, Maryland, and Virginia all have programs for people with low to moderate incomes or who have as little as 3% for a down payment. Funds for these programs may have been secured when fares were lower, with the savings being passed on to the consumer.

This should be the time to look for sellers who have FHA assumable mortgages obtained when rates were lower. In addition to lower rates, the cost of taking on such a mortgage will be less than setting up a new one, so you could also save money on closing costs. VA loans can also be assumed by active duty military or veterans, or by others in certain circumstances.

Ask the lender you choose to provide you with an estimate of what your mortgage payment could be at different rates. Even if you can afford the payment, it’s best not to be surprised during the process. When you find a rate that gives you a comfortable monthly payment, lock it in so your rate doesn’t increase if or when the Fed makes another adjustment.

Consider whether to pay points to lower your interest rate. One point equals one percent of the loan amount, but you can “buy back” the rate in increments of as little as 1/8 percent. When interest rates were above 10%, it was quite common for sellers to pay points to help a buyer pay off their loan. While I don’t expect that to happen here anytime soon, the “redemption” procedure still exists.

Find a cash injection to reduce your loan amount. Mom and Dad’s National Bank is a common place to get a donation of funds. In 2022, each parent can donate $16,000 to a child or grandchild without tax consequences for the donor or recipient. Consult your tax advisor for more information.

If you have a 401k retirement plan with your employer or a savings plan from the federal government, you can borrow without incurring penalties and pay you back with interest. Most lenders won’t count this as part of your debt load.

Finally, you may need to adjust your expectations for the size and location of your future home, as any rate increases will affect everything from entry-level condos to luxury properties. Still, with the Fed forecasting a rate hike in small steps through 2023, this may still be the optimal time to buy.

Valerie M. Blake is a licensed associate broker in DC, Maryland and Virginia with RLAH Real Estate. Call or text her at 202-246-8602, email her through DCHomeQuest.com or follow her on Facebook at TheRealst8ofAffairs.

Leslie M. Gill