PREPARING FOR INTEREST RATES TO INCREASE

There is a lot of talk in the industry of rates increasing next month and through 2022. We are already seeing slight increases in interest rates ranging from .125% to .25%. A rate at 2.875% a few months ago may be 3.125% or even higher today.

There is an easy way to prepare for this. I have emphasized in previous articles that your FICO score is the number one reason for your ability to qualify for a mortgage. Job stability, income, existing debt, etc. all impact your ability to qualify for a mortgage, but your FICO score has the greatest impact to your buying power.

The easiest way to explain this is to provide you an example. Please note this is only an example and I am not quoting actual rates. Let’s say your current FICO score is 630. On a purchase price of $300,000 with 3.5% down on an FHA loan, your principal and interest payment would be approximately $1,449 per month on a 30-year loan with an interest rate of 4.25%.

Using a worse case scenario, let’s say interest rates increase to an average of 3.75% vs. 3.00% next year. If you increase your FICO score to 700, your rate may be as low as 3.75% and your principle and interest payment would be approximately $1,364 per month.

By improving your FICO score by 70 points in the sample above, you may save $85 per month on your payment even if rates increase from an average of 3.00% to 3.75%

Most lenders adopted a methodology many years ago called risk-based pricing which allows lenders to measure loan risk which can impact your interest rate on FHA, VA and conventional loans and your mortgage insurance on conventional loans.

What are the best ways to maximize your FICO score? If you do not have any late payments, collections, judgements, etc., the most common items that will prevent you from having a higher score are a 1) lack of payment history, 2) the length of payment history on your accounts and/or 3) the balances on your revolving debt (credit cards).

If you only have one or two credit cards, I would encourage you to open another credit card and charge a small amount and pay it off when you receive your first bill. If you already have three credit cards, then the amount owed on your revolving accounts can make up to 30% of your credit score. The general rule is to keep your credit card balances at 30% or less than the credit limit.

For every credit card with a balance above 80% of the credit limit that is paid down to 30% of the credit limit, you can expect up to a 20-point increase per card. As an example, if you have four credit cards with high balances and you pay each of them down to 30% or less than your credit limit, you could potentially see a 60-80-point increase in your FICO score.

Payment history and the length of payment history makes up to 50% of your credit score. Here’s a little secret that most are not aware of to improve your score. If you have a credit card you haven’t used in years and is still open, I encourage you to charge a small amount on the card. In most cases this will improve your FICO score. Wait, did I just say that charging something on a credit card may raise your score? Let me clarify. Let’s say you have had a credit card for eight years, but the last time you used it was three years ago. Currently you have five years of payment history on this card. By charging a small amount and paying it off it brings the payment history forward and overnight because you added three additional payment history years.

Don’t focus and worry about interest rates increasing, focus on increasing your FICO scores and the impact could be minimal to your monthly payment.

Jim Kaiser

Branch Manager, NMLS #1721861

Cherry Creek Mortgage, LLC, NMLS 3001