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How to Increase Your Borrowing Power

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The Fed has been rather active as of late. Just in 2022 alone, the Federal Reserve raised rates five different times as various economists anticipate more rate moves throughout 2023. One of the Fed’s primary roles is to affect the cost of money and to keep prices in line. It’s no secret that inflation has been an issue for more than a year now. And while the rate of increase has pared back a bit, it’s still on the rise.

Economists can also see the Fed is in a bit of a quandary. If they raise rates again soon, investors might interpret that as signs of more inflation abound as the Fed attempts to cool down the rate of inflation. If the Fed sits on the sidelines at the next meeting, it might worry investors the economy is again headed for a downturn, even some suggesting a rate decrease might very well be on the horizon instead.

So, with rates on the move over the past year, that results in less borrowing power for home buyers. Higher rates mean higher monthly payments resulting in borrowers being able to borrow less. Are there ways however to increase your borrowing power? Yes. And the Fed has nothing to do with them.

One way is to take a closer look at your loan term. For example, a 15-year loan will have a lower rate but because the loan term is shorter than a 30 year, the payments are higher, affecting borrowing power. In this case, look closer at a 30-year loan or even a 40-year term. Yes, there will be more interest paid over the life of the loan but you’ll be able to borrow more.

Another way is to consider paying a discount point or two to lower your rate. A discount point is expressed as a percentage of the amount borrowed and is in effect of prepaid interest. Paying one point on a $200,000 loan means paying $2,000 upfront to get the lower rate. Your loan officer can calculate the tradeoffs and monthly payments for you to see if there’s an ideal rate/point combo.

Finally, and this might seem a bit obvious, is to bring more income to the qualifying table. Ask your boss for a raise. Maybe even take a higher-paying job you’ve had your eye on. Maybe there is a co-borrower (parents?) who might be able to cosign on a new mortgage.

If the specter of higher rates has you thinking it might be time to wait, it’s probably better to think otherwise. In light of potentially higher rates, the time to buy might be sooner rather than later.

Written by David Reed for Copyright © 2023 Realty Times All Rights Reserved. Reed is from Austin, Texas and is the author of The Real Estate Investor’s Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. A Senior Loan Officer and Mortgage Executive for more than 20 years, he has also appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show.