US homeowners are feeling the pinch as the Federal Reserve continues to raise interest rates to fight inflation.
The average rate on a 30-year fixed-rate mortgage rose above 6% this month for the first time since 2008, putting house hunters and homeowners in a bind.
The higher rate of fixed rate mortgages is forcing more potential buyers to stay on the sidelines of the housing market and continue to rent. Yet rising rates will also hit people with variable-rate mortgages, who periodically adjust their rates based on rate changes for new loans.
While such changes will leave many borrowers helpless, financial advisers say there are several options they can take to offset the pain of rate hikes.
From top to top
The average rate on a 30-year fixed mortgage has more than doubled from a year ago, when it was just 2.86%, according to a recent Freddie Mac survey.
This could cause borrowers to pay vastly more in the long run. For example, the interest paid on a $400,000 home loan over 30 years would be $200,000, but the total interest at 6.02% would be more than double – $465,000 – according to Bankrate.commortgage calculator.
Housing is a basic human need, which is why housing is often the biggest expense for many families. Rent or mortgage often takes priority over other essential payments.
It is well known that stagnating wages and student debt have kept many Millennials out of the real estate market. Yet the pressure on indebted senior citizens has also increased. Research from Harvard University’s Joint Center for Housing Studies shows that the share of homeowners aged 62 and older with a mortgage rose from 30% to 41% between 2001 and 2017.
Since mortgages are the primary vehicle for home ownership, managing them is essential for the well-being of all homeowners, young and old.
Fixed vs Variable
Current economic conditions are a clear reminder of the advantages of a fixed rate mortgage over variable rates.
“While a variable rate mortgage may have been advantageous when you first purchased your home, it may not look like clear skies in today’s environment,” said Ryan Bannister, CPA , and owner of 1Up Financial Advisors, which specializes in financial planning for video creators.
“I generally like fixed rate loans better, because then you get what you get and it won’t be subject to market changes. New home builders and their lenders sometimes offer great incentives on variable loans. I urge you to do your due diligence and make sure a loan makes sense for the specific home you want.
Achieve refinance
Depending on their situation and the terms of their loan, rising rates may encourage homeowners to seek better rates when refinancing their mortgage.
Rate and term refinancing consists of taking out a new loan to replace the existing one. Ideally, the last loan taken out is better suited to the needs of the borrower, usually offering a lower interest rate or adjusting the term (or duration) of the loan.
“You may want to explore refinancing your mortgage to a fixed rate…that would solve your problem of increased payments,” Bannister said. “But before you jump in, you’ll want to compare the closing costs (usually between 2-6%, depending on the lender) to the amount you’ll save on your payment. For example, if the closing costs you incur when refinancing are greater than the savings you will accumulate over the years you plan to stay in the home, it may not make sense to refinance.
Cash refinancing, on the other hand, allows borrowers to leverage their home to access new lines of credit.
Michael R. Acosta, CFP at Consolidated Planning Inc., said it presents borrowers struggling to repay personal debt with the means to pay it off.
“Consider the following – if a homeowner has $25,000 in outstanding credit card debt where interest rates are rising and tend to be around 19.99% or higher, they have the ability to perform a cash refinance to pay off the debt at the higher rate and basically roll it into their mortgage,” Acosta said.
“Will their mortgage payment go up?” Yes, based on the increase in the outstanding mortgage balance and assuming their interest rate also increases… there is a high probability that the increase in their fixed monthly mortgage payment will increase less than what they were paying for the outstanding balance of their loan,” he said. added.
“It’s not 100% bulletproof, so it makes sense for borrowers to do their homework, speak with a mortgage specialist, and crunch the numbers,” Acosta said.
Rhythm is the thing
Refinancing, however, is not the only option. The frequency of payments is also a key factor.
Bannister recommends looking at bi-weekly payments.
“If your lender doesn’t charge extra for doing this, making bi-weekly payments will require you to make an additional monthly payment every year. This can significantly reduce your loan repayment period if you plan to stay long term,” he said.
Alternatively, if borrowers are close to their loan finish line, they can dig deep to pay it all back in one lump sum.
“Let’s say you’re 28 years old on a 30-year variable rate mortgage and you don’t want to deal with the increased payments, if you have the savings it might be a good idea to pay off the remaining balance of the loan,” Banister said. .
“It really only works in specific scenarios – for example, if you live on a fixed income portfolio and your increased mortgage rate is higher than the interest the portfolio earns. “
Managing mortgage payments can be an arduous and vexing process. Yet, rather than just blindly paying more, savvy borrowers should try to find a way to offset the rising costs incurred in this tough economic climate.
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