Ways to prepare for higher Mortgage Rates
Mortgage rates on the rise? What you need is some smart strategies to prepare.
Here are the top 5 tips:
Choosing a variable rate or a fixed rate mortgage most likely will depend on your financial situation and your tolerance for risk.
With a fixed interest rate mortgage, the interest rate is deter-mined when you apply for a mortgage and is set for the length of the mortgage term. Because the interest rate does not change, you know how much of your payment is going toward your principal and how much is going toward the interest owed. You also know in advance how much of your principal you will pay during the length of your mortgage term.
Fixed rate mortgages often appeal to borrowers who want stability in their payments, manage a tight budget, or are generally more conservative. For example, young couples with large mortgages relative to their income may be better off opting for peace of mind that a fixed rate brings.
Variable rate mortgages may allow a borrower to take advantage of decreasing rates. Interest rate is calculated on an ongoing basis at a lenders’ prime rate minus, or plus, a set percentage. As the prime rate changes the interest rate on the mortgage changes.
With a variable interest rate mortgage, the amount of the payment may be fixed or variable. For budgeting purposes some may wish to set a fixed payment amount each month. If rates change, the payment amount stays the same, however the amount paid toward the principal and the interest varies.
It is important to discuss the pros and cons of both types with a lending professional to ensure borrowers make the right decision for their budget.
Consider the following money-saving steps when calculating your mortgage payments:
By shortening your loan repayment or amortization period to 20 years from 25 years, you'll pay your mortgage off five years sooner. You'll pay higher monthly payments, but you'll build equity faster and you'll pay less in interest over the long term.
Apply for a prepayment option. If you receive one, you can directly pay down some of your principal before it's due. Make sure to check for prepayment penalties.
By paying biweekly instead of monthly, you'll make 26 payments in a year or 13 months instead of just 12 months and reduce your amortization to about 20 years from 25 years.