The rising mortgage interest rates should make you rethink your debt payment strategy. According to reports, the mortgage applications have gone down because of the rising interest rates. A 30-year fixed-rate mortgage rose from 4.77% to 4.84% while an adjustable-rate mortgage rose from 36.8% to 37.1%. Apparently, the rates are rising because of the tensions being felt between nations.
Regardless of the reason why the interest rates are rising, there is one thing that is for certain – you need to think about how it will affect your own mortgage payments. Buying a house is an investment. It is one of the good debts that can really improve your personal net worth. When you handle it properly, it can also secure your financial future.
Although all of these benefits make home buying very appealing, it is also something that can seriously compromise your future. If you fail to pay it off properly, all the equity you have tried to build will be gone. The opportunity to grow your net worth will be missed.
What makes your mortgage dangerous is the fact that it will take you a very long time to completely pay it off. It is a big debt after all. Even if you borrow a 15-year mortgage, a lot of things can still happen within those years. One of them is the possibility of rising mortgage interest rates. If you fail to act accordingly, this change in the interest rate can cost you a lot of money. But if you know how to react to it, you might be able to save thousands of dollars on your mortgage. Not only that, you might be able to expedite the payment process so you can completely own the equity of your home.
Keep the rising mortgage rates from affecting your payments
While the rising mortgage interest rates can be daunting, there are things that you can do to ensure that it will only affect your finances positively. As soon as there is a hint that the interest rate is changing, you need to start thinking about refinancing your mortgage. However, before to apply for one, you have to make sure that refinancing makes sense. Ask yourself if this move will help improve your mortgage payments and your overall financial situation.
But how will you know if refinancing is a good idea? You need to make sure that it satisfies either one of the following:
Change from variable to fixed rate
If you borrowed an adjustable-rate mortgage, you are one of the homeowners affected by the rising mortgage interest rates. This means the interest rate of your mortgage will be dependent on the current rates set by the Federal Reserve. If the rates are rising that means your monthly amortization will also increase. You need to act on this immediately by refinancing into a fixed-rate mortgage. This is actually a good time to do this since the rates are starting to slowly rise once more. According to reports, economists are expected that the average fixed-rate will rise by 5% within this year. You need to act quickly so you can be approved of a better interest rate. If your credit score improved since you last borrowed your mortgage, you might be able to get a great rate on the new one.
Make sure the interest rate is lower
Another way to make sure that the refinancing will improve your mortgage payments is when you can get a lower interest rate. This is actually applicable to those who have a fixed-rate mortgage. If you notice that the current rates are lower than what you currently have, you need to consider refinancing before the mortgage interest rates continue to rise. And if you have a better credit score, that will give you a better interest rate on the new loan.
Get a loan with a shorter-term
Finally, you can refinance your mortgage if you can afford to get a shorter-term. This is ideal for those who have a higher income compared to the time when they first borrowed their mortgage. If you can afford to pay a higher monthly amortization, it makes sense to refinance your mortgage. The higher payments will help you pay off your debt faster. With a shorter-term, you will pay less on the interest and in the end, that will lower the overall amount that you need to pay towards your home loan. If you do it before the mortgage interest rates continue to rise, you are sure to save more money on this. Not only that, it will expedite the growth of your personal net worth – which is always a good thing.
How to pay off your mortgage early
Apart from improving your mortgage interest rates, it is also a good idea to start thinking about how you can pay it off early. As mentioned, the earlier you complete the payments, the better it will be for your financial position. You will increase your net worth and get rid of a huge amount of debt. Once that happens, you will have a lot of extra money in your hands. You can take advantage of that by investing it to grow your net worth further or to improve your standard of living.
So how can you pay off your mortgage early? Apart from making sure that you take advantage of the changes in the mortgage interest rates, you can take control of your monthly payments. Here are some suggestions that you can consider.
Make biweekly payments
Instead of just giving one monthly payment, divide the amount into two and pay that amount every two weeks. For instance, if you paid $1,000 a month, you will pay $500 every two weeks instead. Since there are 4 months a year that has a 5th week, you will end up paying an extra month in one year. That means making your balance $13,000 lower rather than just $12,000. This extra monthly payment is big enough to lower your interest payments significantly.
Pay more towards the principal payments
This is possible for most lenders – but you have to check with the terms and conditions of your loan first. If this is allowed, you should mark your payments as “principal only.” That means the payment will go to the principal amount that you owe. Usually, payments sent by borrowers are used on both the principal and interest. But by working on the principal amount first, it will save you from paying high-interest charges. Take note that you will not do this every month. Let us say that your monthly amortization is $1,036. You can choose to send $1,100 instead and indicate that the extra $64 should be paid towards the principal amount. This will not only lower the interest charges, it will also help you pay off the loan faster.
Use windfalls to pay your mortgage
According to a survey, more people will choose not to spend windfall money frivolously. That means they will not be quick to spend it on unnecessary things. It may be safe to assume that these people will choose to pause and think about the best way to use the windfall on something that will improve their financial situation. If you have a mortgage, the best way to use the windfall is to pay extra towards your mortgage. The reasons are the same – it will lower your interest charges and will help you get out of debt faster. Once you have paid off your mortgage, you will be left with a higher equity and a bigger personal net worth.