If you are like thousands of other Americans waiting for high-interest rates to drop so you can make a major purchase like a new home, you’ll have to keep waiting. Rates remain steady at the moment.

The Fed didn’t lower the rates during 1st quarter, largely because inflation remains high.

While there is optimism that rates will drop at some point this year, there are no answers to the questions of “when” and “how much.” The positive of waiting is, there are some things you can do now to prepare yourself for when rates do drop to help you improve the likelihood your loan will be approved and with better terms.

Evaluate Your Financial Position

Before diving into the loan application process, take a full look at your financial situation. 

Start by checking your credit score, as good credit standing is important for loan approval. Websites like Credit Karma offer tools to help monitor and understand your credit profile. You should also evaluate your income and expenses, and calculate your debt-to-income ratio to judge if you can take on more debt.

High interest rates mean higher overall costs over the life of the loan. Calculate the total interest you would pay with different loan scenarios to make an informed decision about affordability. Understanding the long-term financial implications of your borrowing choices is important to avoid future complications.

Collateral is an asset that you pledge to secure a loan, such as your home or car. Understanding the concept of collateral is crucial, as defaulting on a secured loan could result in the loss of the pledged asset. Evaluate your risk tolerance and consider whether you're comfortable putting up collateral for a loan.

Pay Down Debts

Before taking on more debt, it’s a good idea to see if you can significantly pay down, or completely pay off, any debts you have now.

When determining how much you can borrow, a lender will compare your monthly debt payments to your gross monthly income to determine your debt-to-income ratio (DTI). If you have an extensive monthly debt burden – for example, a high DTI ratio – your pre-approval amount will be lower.

You’re better off focusing on the larger debts you owe as opposed to trying to pay off the smaller ones. Revolving and installment debts – like credit cards and car payments – aren’t necessarily a bad thing when it comes to your credit score, so showing you can manage multiple types of credit can be beneficial.

That said, it always feels good to get rid of one financial burden before taking on another.

Save, Save, Save

If you don’t have a large number of debts you’re working to pay down, then start setting more money aside.

Having more money set aside to put down on the front end of a loan can also be beneficial. You can make a larger down payment to reduce the balance you'll pay interest on.

Also, if you’re taking out a home loan, making a down payment of at least 20% of the total purchase price, can get you approved for a higher loan amount.

That’s because putting down 20% eliminates private mortgage insurannce (PMI), which is a cost tacked onto your monthly payments when you take out a conventional loan.

Consider a Mortgage Buydown

If you can't wait for mortgage rates to drop, one option to consider is a mortgage buydown, also known as mortgage points. A mortgage buydown is essentially a way to lower your interest rate and, consequently, your monthly mortgage payments.

Here's how it works: When you buy points, you're essentially prepaying some of the interest on your loan upfront in exchange for a lower interest rate over the life of the loan. Each point typically costs 1% of your total mortgage amount and can lower your interest rate by a certain percentage, usually around 0.25% per point, though this can vary depending on the lender and the current market conditions.

There are two types of mortgage buydowns: temporary and permanent.

  • Temporary buydowns involve paying extra points at the beginning of your loan term to reduce your interest rate for a certain period, typically the first few years. After the initial period, your interest rate will reset to the original rate specified in your loan agreement. 

  • Permanent buydowns involve paying points upfront to permanently reduce your interest rate for the entire duration of the loan.

It's important to carefully consider whether a mortgage buydown is the right choice for you. You'll need to calculate whether the savings from the lower interest rate justify the cost of buying points upfront and determine how long it will take to break even on your investment.

Get Prepared

While there are numerous types of loans available, each has its own set of rules and benefits. Regardless of what type of loan you’re taking out, it's essential to research and understand the options available to you. Take the time to compare interest rates, repayment terms, and eligibility requirements for each type of loan to determine which best suits your needs.

Requesting loan terms before you make your decision is crucial. Even a slightly lower interest rate or reduced fees can result in significant savings over the life of the loan. By comparing offers, you'll be better equipped to find the most favorable loan terms for your financial situation.

There are a few crucial things you can do to prepare for all types of loans:

  • Gather important financial documents, such as pay stubs and bank statements, to streamline the application process.

  • Research the different types of loans available to understand their respective rules and benefits.

  • Compare loan options from multiple lenders to find the best deal in terms of interest rates, fees, and repayment terms.

  • Consider seeking pre-approval from lenders to better understand your borrowing capacity and negotiate more effectively.

  • Evaluate your budget to ensure you can comfortably afford the monthly payments associated with the loan.

  • Review your credit report for any errors or discrepancies that could affect your creditworthiness and take steps to address them before applying for a loan.

  • Consult with a financial advisor or loan officer to discuss your options and determine the most suitable loan for your needs and financial goals.

By gathering necessary documents, researching loan options, and shopping around for the best deal, you'll be better positioned to make informed decisions and achieve your financial goals.

Should You Wait?

The decision to take out a loan now or wait for potentially lower rates is highly individual and depends on various factors such as your financial goals, risk tolerance, and market conditions.

While waiting for rates to drop may seem promising, it's a good idea to weigh the potential benefits against the risks.

Reasons not to wait: What is the loan for? If NOT taking out a loan is going to put you in a worse financial situation – ie, you have outstanding medical debts, or you need to consolidate your high interest debts into one payment – then shop around for the best option.

If you can wait, then the best option is to do so. For how long? That depends on when you finally feel comfortable with your ability to afford the best option you can find. Luckily, waiting a bit should help make that a little easier.

Consider consulting with a financial advisor or mortgage expert to assess your options and make a decision that aligns with your financial goals.

 

Sources:

https://www.cnbc.com/select/when-will-interest-rates-drop/

https://www.cbsnews.com/news/will-mortgage-interest-rates-drop-after-the-feds-march-meeting-heres-what-experts-predict/

https://money.com/homebuyers-wait-mortgage-rates-drop/

https://www.rocketmortgage.com/learn/how-to-increase-mortgage-preapproval-amount