How to Adjust to Higher Rates

How To Adjust To Higher Mortgage Rates

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It seems like we are hearing weekly how bad things are getting in the economy. The Fed is continuing to raise the rates and purchasing a home is becoming more unaffordable. Is this affecting Real Estate Investors and if so, is there anything we can do about it?

I have been hearing a lot of the same questions around this topic.

• How can you make the numbers work when mortgage rates keep going up?
• Are investors still buying?
• Are there any tips or tricks to reducing the impact of rising rates?
• How to use Leverage effectively in today’s rising interest rate market?
• Are real estate investors still buying?
• Does 30-year loan still make sense, or should I consider ARM or interest-only loan?
• Can I get a good balance between cash flow and appreciation or is cash flow long gone?

Ways to Save with Higher Mortgage Rates

1. Keep your Credit Score High

Now more than ever it is crucial that you have a high credit score. Typically, if you are above 740, you will get the best rates available. Your credit score, if high, can save you thousands of dollars on the life of your loan.

2. Lock In your Rate Early

You are allowed to lock in your mortgage rate after your loan application has been finalized all the way up to 5 days before the closing. Rate locks typically last 10-60 days, so if rates are rising, it is good to lock in as soon as possible.

3. Consider an Adjustable Rate Mortgage

What is an ARM (Adjustable Rate Mortgage)?

An ARM is a mortgage where interest rates can change over a set time based on market forces represented by an index rate.

With an ARM, your rate is locked for a specific period of time. Say 3 or 5 years. Then after this initial lock period, the rate can increase, but there is a cap as to how high.

ARMs can make sense to an investor if the interest rates are lower than a 30 year fixed rate. This can improve your cash flow during the initial fixed rate period.

Before the initial rate expires, you will want to pay attention to what the market is doing. Then, make a determination on what will work for you after the initial lock period ends. Maybe you leave it, or you refinance, or you sell.

4. Put More Money Down

In some cases, an increase in down payment can reduce your interest rate. The biggest reason for this is risk or risk based pricing. Less risk for the lender could equal a lower interest rate for you.

5. Pay for Points

If you are planning on keeping the property long term, but the numbers are tight, it might make sense to pay for points.

You can pay for points to reduce your interest rate. One point is equal to 1% of the loan amount and can reduce your interest rate by .25%, although that can vary from lender to lender.

The goal is to keep the property long enough to offset the cost of paying for the points.

6. Do a Shorter Loan

Interest rates are lower when you do a 20, 15, or 10 year mortgage, but the numbers need to work for you. So, make sure that you still have cash flow and this makes sense for your long term goals.

We never suggest buying a property with negative cash flow. However, we know some investors are ok with this and they might like the lower interest rates. Some investors buy for appreciation, but the quicker way to passive income is definitely CASH FLOW.

7. Plan to Refinance in a few Years

Most “Buy and Hold” investors are planning to keep their properties long-term. So, as long as the property has cash flow right out of the gate, you can always watch rates and refinance the loan at a later time. You could even pull money out to buy another property if you add value or it appreciates over time.

8. Work with the Right Lender

No matter what is going on in the market, it is best to have the right lender. One who can navigate you through process, is knowledgeable, and can get the job done.

You want someone who has been around a while and who has seen the ups and downs of the market. Someone who has a great track record and who is well recommended. Someone who goes the extra mile to give you not only a great rate, but great service.

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