Due to a down economy and slow housing market, interest rates on mortgages have been low for years. However, the housing market is turning around and with that the trend of low interest rates could be coming to an end. As reported recently in Fox Business, we can expect to see a rise in rates as soon as the new year. Once that happens, existing mortgages and home equity loans on variable interest rates – as well as new loans – could come at a much higher cost.
Interest rate changes since 1976
So what can you do if you’re about to get locked in at a high interest rate or have no hope of obtaining a new loan at a lower rate? While you can’t change the market, there are things you can do to save money.
How to Save Money on an Existing High Interest Loan
Do you have a home loan or line of credit on variable interest terms? If so, the new year could bring with it a much higher monthly payment. However, you still have time to act now to mitigate the potential damage to your monthly budget. Here are a few options:
Consider refinancing. Since interest rates are still low at the moment, now might be a good time to consider refinancing your mortgage. Contact your current lender as well as new banks and lenders to see who has the best rates to offer. Once you know the lowest rate you can qualify for, do the math to see how much that will save you each month and on the loan overall. Then compare that with the costs of proceeding with the refinance. If you end up ahead, then strike now while the iron is hot. And if you do move forward with a refinance, you might want to consider switching to a fixed rate loan so that you can avoid surprise rate increases later on.
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Make biweekly payments. If refinancing isn’t a good or realistic option for you, then you can set up your payments in a way that will cost you less in interest over time by shortening your loan: biweekly payments. How biweekly payments work is you split your monthly payment in half and pay that every other week. Two months of the year will receive three of these payments, equally one extra full payment per year. This can make a huge dent on the life of your loan with minimal impact on your budget.
File taxes early. Employers are legally required to give you the necessary tax documents by the end of January each year. As soon as you have these documents, file right away. That way you can ensure that, if you receive a return, you will get it months before most others who wait until April. Then either make one lump sum payment to your principal so you can decrease the life of your loan. Or, if your payments do go up in the new year and you have trouble making those payments, split up your tax return over the next 12 months if possible and apply it to the increased payment. This will help you meet your current obligations while buying you more time to explore a refinance the next year.
How to Save Money on a Future High Interest Loan
If you don’t yet have a mortgage, then there’s still time for you to make the necessary financial preparations that will mitigate a higher interest rate. Here are a few things that will help you save money:
Save until you have a higher down payment. Unless you need to make that home purchase as soon as possible, then it might be prudent to wait on the purchase for a few more months so you can save for a higher down payment. And if you do save for a higher down payment, don’t allow lenders to convince you to then increase your home buying budget. Rather, keep the budget you have in mind now and allow a higher down payment to make up a higher percentage of the price overall. This will ensure you lower monthly payments and could even qualify you for lower interest rates. Not to mention that you could obtain a shorter loan, leading you to a paid off home even faster.
Shop around and ask for competitive rates. Whenever you do enter the home buying market, don’t be too shy to shop around for rates and tell your potential lenders what you’re seeing. If Bank A is offering a lower rate than Bank B, Bank B might be willing to match or beat that rate to obtain you as a customer. You only get what you ask for!
Don’t forget to work on your credit score. It’s been said time and time again, but that doesn’t diminish the importance of maintaining the highest credit score possible. A high credit score is the key to the lowest interest rates possible. Lenders see this as a report card of sorts to let them know the likelihood that you’ll repay your loan. Keep your credit score high by making on time payments on all accounts every month and keeping your debt utilization below 30%. It takes time to improve a credit score, but the time is well worth it when it comes to future loans.
The market is volatile – unexpected changes could arise at any time. Sometimes these changes work in your favor and sometimes they work in the favor of banks and lenders. The best thing you can do to prepare yourself for these changes is to remain calm and figure out what you can do about it. You only have control over your own finances, but that means there are always steps to take to improve your financial future.
Image Credit: Diana Parkhouse