For people who have an adjustable-rate mortgage, this translates into payment hikes. Even for those who have a fixed-rate mortgage, household budgets may be tighter than normal if other consumer debt payments, like automobiles and credit cards, increase with interest rates. Here are some strategies to help you lower your overall mortgage payment and keep your monthly budget in check.
Strategy #1 - Refinance Your Mortgage
If you are among the people who were fortunate enough to lock in an extremely low fixed-rate mortgage a year or so ago, then a refinance might not make sense. However, if your rate is not all that great, or it is on an adjustable scale that is climbing steadily, a refinance might be a great option to consider. When you refinance, your remaining loan balance is re-amortized over the full term of the loan, often reducing your overall monthly payment. You can also choose a fixed-rate period from 5 to 30 years, giving you peace of mind that your payment won’t inflate with rates.
To get a better idea about refinance options & possible benefits unique to your situation, consider consulting with a mortgage broker or a financial strategist.
Strategy #2 - Recast Your Mortgage
If you do have a great rate already locked in place, and a refinance doesn’t really make sense, another strategy that might be worth considering is a principal pay down, followed by a recast of the mortgage. Some lenders will allow you to make a penalty-free lump sum principal reduction payment, and then will recast the remaining loan balance over the full remaining term of the loan. This means that going forward, the monthly payments will be lower because they are figured from the new, lower mortgage balance.
If you are thinking about employing this strategy, start by having a conversation with your lender to understand their policies, restrictions, and any fees associated with a recast.
Strategy #3 - Modify Your Mortgage
While a mortgage modification isn’t going to be a viable option for everyone, people who find themselves really struggling to pay their monthly house payment might benefit from this strategy. While there are many different terms and structures for a mortgage loan modification, the overall idea is that the lender will make temporary or permanent changes to your mortgage terms in order to help make the monthly payment more affordable and avoid foreclosure. There are downsides to going this route, like damage to your personal credit score, and you will likely have to be able to prove that you are experiencing some sort of financial hardship.
Loan modification is generally thought to be more of a last resort option, but if you feel it might be a necessary strategy to consider, you should talk with a legal professional before proceeding.
Strategy #4 - Pay Off Your Mortgage
Sometimes carrying a mortgage makes good financial sense, and other times it just doesn’t. If you are a person who has been leveraging a mortgage largely because the rates were so low that it didn’t make sense to use your cash, then you might want to think about changing up your strategy now that rates are going up. Paying off your home’s mortgage will typically free up a lot of monthly cash flow, and may make much more financial sense than leaving your money in an investment or savings account that is barely earning any interest or dividends.
Before making the decision to liquidate investments or move large amounts of money around, it is best to consult with a financial advisor or whoever you trust to provide you with investment and tax counsel.