High mortgage rates can be a source of concern for homeowners and aspiring buyers alike. According to BankRate, “The last time U.S. mortgage rates were this high, Facebook had yet to be invented, Bill Clinton was winding down his second term and LeBron James was a high school sophomore.”
While you might be feeling a little panicked, you can still achieve your goals and minimize the impact of high interest rates on your financial health. Here are 4 things you can do when mortgage rates are high, and how you can make the most out of your situation.
1. Refinance Your Mortgage:
One of the first steps you can take to deal with high mortgage rates is to refinance your existing loan. Refinancing involves taking out a new mortgage that pays off your old one, usually with lower interest rates and better terms. This can help you save money on your monthly payments, reduce your total interest costs, and even shorten the lifespan of your loan.
NerdWallet gives you a few things to consider when you’re thinking about refinancing:
- Your current interest rate. Take a look at your most recent mortgage statement to confirm your mortgage interest rate. Since even small fractions of a percentage point can really add up, it's important to know the real number, not just "about 6%." If rates have decreased, you can figure out how much you'd save. But if rates have increased, consider whether the other benefits of refinancing are worth the additional interest.
- An estimated amount for your refinance. Whether you'd simply be refinancing the amount left on your mortgage or you're looking to take out a larger loan, keep that sum handy, too. Refinancing comes with closing costs, which usually run between 2% and 6% of the amount of the new loan. Knowing how much you'll be borrowing allows you to estimate those costs.
- How long you plan to stay in the house. If your goal is to save money by refinancing, you need to figure out your break-even point. That's when your savings from refinancing is larger than the amount you spent on closing costs. For example, if you pay $3,600 in closing costs to save $100 a month, it will take 36 months to break even ($3,600 divided by $100 equals 36). To make back that money in savings, you'll need to stay in the home for at least three years after your refi.
2. Pay More than the Minimum:
Another way to cope with high mortgage rates is to pay more than the minimum required each month. By making larger payments, you'll reduce the principal balance of your mortgage faster, which can help you save money on interest in the long run. Even adding a small amount to your monthly payment can make a difference over time. You can also consider making extra payments throughout the year; for example, you can put your tax refund or year-end bonus towards your mortgage. Just make sure to check with your lender first to see if there are any penalties for prepayments or limitations on how much you can pay.
3. Consider an Adjustable-Rate Mortgage:
If you're planning to buy a home soon and are worried about high mortgage rates, you can also consider an adjustable-rate mortgage (ARM). An ARM is a type of mortgage that has a variable interest rate that can change over time, usually after an initial fixed-rate period. While this may seem risky, ARMs typically offer lower rates and monthly payments in the initial few years, which can give you time to build up your savings and improve your finances. Just keep in mind that an ARM can also lead to higher payments if rates go up, so make sure to weigh the pros and cons carefully before choosing this option.
4. Seek Professional Advice:
Finally, if you're still unsure about what to do when mortgage rates are high, you can always seek professional advice from a financial planner or a mortgage broker. These professionals can help you analyze your situation, explore your options, and come up with a customized strategy that matches your goals and budget. They can also provide you with valuable insights and guidance on how to manage your debt, optimize your credit, and improve your overall financial wellness.