What the Federal Interest Rate Hike Means for Landlords
In an attempt to cool down the market currently experiencing a spike in homes, groceries, and gas prices, the Federal Reserve hiked the interest rate by 0.25%. The quarter percentage hike is the first of its kind by the Fed in the past three years. However, six more hikes are expected by the end of this year.
The federal interest rate designates the percentage of interest the banks pay when they lend and borrow money to each other overnight. It's important to know that consumers do not pay this rate. However, the interest rate hike still has a trickle-down effect, affecting the saving and borrowing rates for the regular public.
Below, we provide an overview of how the interest rate hike will affect landlords. Plus, what can you do in response to this federal interest rate?
What Does the Interest Rate Hike Mean For Landlords?
Being a landlord, you're likely to be impacted by the interest rate hike. You need to know that, with a higher interest rate, you can make more money from your rental units. However, this also means that it will be more expensive to borrow money for other investments in your property portfolio.
Mortgages Get Expensive
Due to the rise in the federal interest rate, the banks now have a higher cost of credit. They'll pass on these higher rates to consumers, such as landlords who want to take out big loans, including mortgages.
As a result, the mortgage interest rate is projected to rise. This will make it more expensive for landlords to buy new properties or refinance their existing ones. So if you're planning on doing either in the near future, you may want to get it done sooner than later.
Economists speculate that the mortgage interest rate will go even higher in the future as the Fed announces more interest hikes. Currently, the average mortgage interest rate for a 30-year mortgage is 3.85%. It could go up to 5.5% later this year.
High Credit Card Bills
If you use many credit cards to finance your rental properties or day-to-day expenses, you'll see the interest rate on those go up. The banks will increase the rates they charge merchant customers, which will be passed down to you in the form of higher prices.
According to Bankrate, the current credit card rates are 16.34%. But with the Fed's move to increase the federal interest rate, the annual percentage rate on credit cards will go up.
The Fed does not directly influence the deposit rate for savings accounts. However, the federal interest rate has an indirect effect on it. With a higher interest rate, people would instead leave their money in the bank and earn interest on it.
It means that banks will have to offer a higher rate to depositors to keep them from withdrawing all of their money. But banks are not ready to do this for consumers.
As of right now, the average savings account yield is 0.06%, which is relatively low. However, the high inflation rate means any money you make on a savings account will not have the purchasing power it did when you deposited it initially.
What Can Landlords Do?
Landlords with ongoing mortgages will be directly affected by the Fed's interest rate hike. It's important to stay on top of your mortgage and credit card interest rates and make sure you're getting the best deals possible.
Improve Your Credit
One way to lower your mortgage payments is to improve your credit score. The higher your score, the lower the interest rate you'll be offered.
Even if you don't want to buy another property right now, it's wise to make active efforts to improve your credit score. Then, it will be helpful when you need to buy a home later.
Look for an Adjustable Rate Loan
An adjustable-rate mortgage has a lower interest rate than a fixed-rate mortgage. However, the interest rate will change over time according to the market conditions.
If you're planning on selling your property soon, an adjustable-rate mortgage may be a good option for you. You can now take advantage of the lower interest rate and sell before the rate increases.
Refinance Your Loan
If you have a fixed-rate mortgage, you can refinance to a lower interest rate and save money on your monthly payments. The approach is beneficial if you plan to hold onto your property for the long term.
You can also consider refinancing to a shorter loan term. Although your monthly payments will be higher, you'll pay less interest over the life of the loan.
Use a Home Equity Loan
If you have some equity built up in your property, you can take out a home equity loan to finance your purchase. The interest rate on a home equity loan is usually lower than on other loans.
Make sure you consider other options before you take a home equity loan. Use it as a last resort.
Revisit Insurance Payments
If you have a traditional loan or a USDA loan with MIP (mortgage insurance premium), you can lower your monthly payments by removing the insurance. You can place a request to remove the mortgage insurance payments if you have reached 20% equity.
Being a landlord, you'd obviously be reluctant to remove insurance from your property. But Steadily has your back. Steadily's landlord insurance can provide coverage against legal liabilities, water and fire damage, natural disasters, and tenant injury. Get a quote today for peace of mind and protection for your property.
The interest rate hike isn't good news for landlords since it will increase the cost of borrowing money. As a result, you'll have to pay more in mortgage payments. To make matters worse, the rising inflation further lowers the value of your existing money. But there are ways to lessen the impact of high mortgage payments.
By improving your credit score, refinancing your mortgage, or using a home equity loan, you can save money on your monthly payments. You can also remove insurance payments if you have reached 20% equity in your property.
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