Rising interest rates make borrowing more expensive and debt more burdensome — and the rates are rising fast.
Before 2022, the Fed hadn’t increased its benchmark interest rate since 2018. But, in March, high inflation forced a rate hike of .25%. Then in May, the Fed doubled its last hike with a .50% increase. In June, the central bank got even more aggressive with a .75% increase — the biggest hike since 1994. That was followed by two more .75% rate hikes, one in July and another in September — and most analysts expect that No. 4 is coming in early November.
According to the St. Louis Federal Reserve, the average rate for a 30-year fixed-rate mortgage was 6.94% on Oct. 20 — a far cry from Dec. 31, 2020, when it was 2.67%, the lowest in history. Rates spent nearly all of the 2010s below 5%, and the last time they flirted with 7% was during the Great Recession in 2008.
During the 2000s, rates held steady between 5% and 7.5%. Borrowing money had been much more expensive in the 1990s, when the average mortgage rate spent much of the decade above 8%. Even that was nothing compared to the bad old days of the 1980s, when double-digit interest was the norm — at the height of the inflation crisis in 1981, mortgage rates topped out at an eye-popping 18.63%.
It’s now getting expensive to borrow money once again. If you’re in the market for a loan — any kind, not just a mortgage — or if you’re already struggling with high-interest payments, follow this guide to getting the best rate possible.
Get Your Credit in Fighting Shape and Keep It That Way
In borrowing and in life, the smart move is to focus on controlling the things you can control. You can’t control inflation or the Federal Reserve’s action to remedy it, but you can control your credit — and that holds greater sway over what you’ll pay for a loan than anything else.
Lenders reserve the lowest rates for borrowers who pose the least risk — people with excellent credit. On the other hand, borrowers with shaky credit get saddled with more expensive loans. This holds true whether you’re taking out a mortgage, an auto loan, a personal loan or any other kind of borrowing.
According to Business Insider, the average rate for a 30-year fixed-rate mortgage is 6.376% for borrowers with excellent credit scores between 760 and 850. For those with lower scores between 620 and 639, however, the rate jumps to 7.965%.
While that might not seem like a big difference, the borrower with excellent credit will pay $311,541.77 in interest over the life of a $250,000 loan. The borrower with average credit will pay $408,193.51.
On Oct. 24, Wells Fargo’s interest rate for a 30-year fixed mortgage was 6.875%. At Bank of America, it was 7%. On the very same day, Rocket Mortgage was charging 7.25%.
There are more than 5,000 mortgage lenders in America, and rates can vary considerably from one to another, even for the same loan for the same borrower on the same day.
Shopping around is key; but, with so many lenders, poring over the options one by one can be an impossible hill to climb. The FTC recommends considering working with a broker — brokers have access to multiple lenders and can compare the options to help you get the best deal.
Here, too, it’s important to shop around. Contact more than one before deciding whom to work with.
Shorten the Term
When you borrow money, there’s a tradeoff between the length of the loan and the interest rate. Loans with shorter terms — like three years for a car loan instead of five or 15 years for a mortgage instead of 30 — typically have lower interest rates. Shortening the term can lower your rate by a full percentage point, according to the Consumer Financial Protection Bureau (CFPB).
Also, your overall costs will be lower because you’ll be making interest payments for a shorter amount of time. But the tradeoff with shorter loan terms is higher monthly payments.
Put More Money Down
If you’re borrowing money to buy something like a house or a car — as opposed to a personal loan — you can usually count on lower interest rates if you kick in a bigger down payment. That, according to the CFPB, is because lenders see you as posing less of a risk when you have more of your own skin in the game.
Buy Down Your Rate
Mortgage lenders offer borrowers the opportunity to buy down their interest rates with points. One point equals 1% of your mortgage or $1,000 for every $100,000 borrowed, according to Bank of America. It only makes sense if you plan to stay in the home long enough to reach your break-even point, which is the time it takes for you to recoup the cost of purchasing points. But if you plan to put down roots, buying points can save you significant money on interest payments in the long term.
Contact Your Lender and Consider Transferring Debt
If you’re already grappling with high interest, it almost never makes sense to pay a credit repair agency to try to lower your rates, according to Forbes. Instead, you should simply call your lender and ask for a lower rate — they might be able to convert you from one account type to another if you qualify.
If not, consider transferring the debt to a low- or no-interest account. One strategy is to move your debt to a balance transfer card with a 0% introductory APR offer. Another is to open a home equity line of credit to move the debt there. Some investment brokerages, like M1 Finance, offer margin lines of credit that come with lower rates as well.
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