Mortgage rates will likely rise after Fed decision, but experts say housing prices will soon drop

On Wednesday, the Federal Reserve raised federal interest rates by 75 basis points for the fifth time this year in an effort to quell record-high inflation.

This comes amid the most recent Consumer Price Index (CPI) report showing inflation increased slightly month-over-month. This sent markets plummeting as investors worry efforts from the central bank aren't working as planned.

For home shoppers, this makes buying a home even tougher as interest rates for 30-year fixed-rate mortgages hit levels not seen since the 2008 housing crash, according to the St. Louis Federal Reserve.

So how should homebuyers approach a housing market with stagnating home prices, yet with interest rates at 15-year highs? Select spoke to two experts about the latest interest rate hike and how consumers, especially homebuyers, should be thinking about it.

The advice of Melissa Cohn, the regional vice president of William Raveis Mortgage, is simple: "You marry the house but date the rate."

This comes from the idea that your home is a long-term purchase, while a mortgage is something you can easily move on from by refinancing. Refinancing a home mortgage is taking your outstanding home debt from one agreement, and moving it to another with more favorable repayment terms. Refinancing is typically done when you have a higher interest rate but lower mortgage rates have become available.

She says to look at the initial mortgage on a home purchase as a "bridge" to better financing later on. She also added that, "It's highly likely that rates will be lower by the middle of next year and even if that projection misses the mark certainly by the end of 2023 or early 2024."

So if you're not particularly happy with the rate you lock in today, consider putting money aside each month for refinancing costs in the near future.

But for those that are on the fence financially when it comes to homeownership, Michele Raneri, TransUnion's vice president of financial services research and consulting, suggests possibly waiting on the sideline. She gives a great example of what monthly payments will look like on a $300,000 home with a 30-year fixed-rate mortgage, assuming a 20% down payment.

At a 3.5% fixed interest rate, which we saw earlier this year, the payment would have been roughly $1,300. Now, with average rates hovering around 6.5%, that monthly payment is now nearly $1,800. She says that by waiting on the sidelines for a few months, home prices could soften and interest rates could come back down. If both of these things occur, it could lead to more affordable homes on the market.

But if you're set on buying a home, or getting ready to purchase in the coming months, these next steps can put in you a great position to potentially qualify for a better mortgage rate.

Prequalify before you shop

If you're actively in the market for a home, you will need to get prequalified before you start shopping around. While there are interest rate averages, each bank has its own underwriting guidelines, so your interest rate with each one may vary.

And on a mortgage, each interest point can make a significant difference in your overall amount of interest paid. On the same $300,000 home mentioned above, the difference between a 6% and 6.125% fixed-rate mortgage over 30 years is nearly $9,000 in additional interest.

So if you're beginning to look at homes, be sure to get prequalified with some of Select's favorite mortgage lenders:

Pay down or consolidate other debts first

If you have any variable-rate debt, your costs will, unfortunately, be going up once again because of the Federal Reserve's actions. So before you shop for a home, it's advisable to pay down all of your high-interest debt first.

In fact, if you pay down high-interest debt, that will likely help you qualify for better mortgage terms.

So if you need to move some debt around, consider one of these two ideas:

• Use a 0% intro APR balance transfer card

If you have revolving credit card debt, you're likely paying exorbitant interest rates on your balance. To help you get out of the debt cycle, consider using a balance transfer credit card to move your debt into a 0% interest rate for 21 months. The process is simple, and the fees to do so are typically between 3-5% of your current balance, but you should be able to save serious money over time and not have to worry about more interest charges racking up.

A few of the best balance transfer credit cards available right now are the Citi® Diamond Preferred® Card, Citi Simplicity® Card and the Wells Fargo Reflect® Card.

Use interest-bearing accounts to fight back

While interest rates going up on debt isn't great news for consumers, you can fortunately take advantage of higher interest rates on high-yield savings accounts and certificates of deposit (CD). While these interest rates are nowhere near rates for a mortgage or credit card, it's an easy way to fight back and make some money from your idle cash.

So if you're saving for a home, or continuing to build your emergency fund for a rainy day, consider opening a CD or using one of these high-yield savings accounts.

Make sure your credit score is as perfect as can be

If your credit score is lower than where you'd like it to be, there are steps you can take to improve your score. To boost your score quickly, consider paying down your revolving credit balances, calling your card issuer and increasing your credit limit and asking to have negative entries that are paid off or errors removed from your credit report. Also, a tool like *Experian Boost™ can instantly boost your FICO® Score by allowing you to connect your utility, telecom and streaming accounts to your Experian credit report, which can potentially raise your FICO® Score.

But first, it's advised to check your credit score to see what is weighing your score down. You can do this quickly and for free using a credit monitoring service like CreditWise® from Capital One or Experian free credit monitoring.

Interest rates are having a large impact on home affordability, leaving many homebuyers on the sidelines. It's frustrating for some, but it can be a great time to get your personal finances in order to prepare for the right home-buying opportunity.

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*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost. *American Express National Bank is a Member FDIC.