Blog

If you’re a homeowner or maybe looking to buy a house soon, then talk of interest rate increases may have caught your attention lately. Of course, that’s understandable, but it’s also important to remember that we’re coming out of an unusually long run of record-low interest rates, so they essentially had nowhere to go but up.

Even so, it’s not all bad news, as there are ways that consumers, homeowners, and mortgage applicants can prepare and protect themselves from rate increases – or even save a whole lot of money in the process!

While most people get the standard mortgage that’s fixed and amortized over 30 years, a 15-year mortgage drastically reduces the amount of total principal you pay. To compare apples to apples, that same $350,000 mortgage at a 5% interest rate (just for the sake of this illustration) will yield $498,199.88 in total payments, allowing you to become mortgage free in half the time for a whopping total savings of $178,195.36.

Obviously, a 15-year mortgage allows you to pay off your home loan in exactly half the time of a 30-year mortgage – 180 months instead of 360. While interest rates on 15-year mortgages are typically lower than for comparable 30-year loans, the monthly payments may be a little higher (since you’re paying off the mortgage in half the time). But your payments won’t be double that of a 30-year loan, and with a lower interest rate and a payoff twice as fast, the total savings over the life of the loan are impressive.

If you want to cut into the total interest that you’re paying on your home loan – the TRUE cost of your mortgage – the smartest thing you can do is to make extra payments, especially in the beginning of your loan. For instance, on a $300,000 home loan at 5% (an example just for educational purposes), if you sent in just an extra $200 with every monthly payment, you would pay your loan off almost seven years early and save nearly $70,000 in interest!

And if you made bi-weekly payments (instead of monthly) or made one extra payment every year (13 payments instead of 12), you’d be mortgage free in a little over 25 years while saving more than $51,000 in total interest.

So, if you really want to save money on your home loan, remember that it’s not just about your interest rate, but what you pay and when you pay it!

Did you get your current home loan seven years ago, five years ago, or even two years ago? And at that time, did you put little or nothing in as a down payment at the time of purchase? You may have even been in an FHA loan with only 3.5% down and mortgage insurance attached.

Either way, your home has probably picked up some serious equity since then, which may equate to a better interest rate and savings if you refinance now.

In fact, Sacramento’s average home appreciated about 9.6% just last year, and close to 20% over the last two years. And California’s market has seen median home appreciation of 15.4% over the last two years and 58% over the last five! With a vastly improved equity position (called Loan-to-Value Ratio), banks and lenders will gauge you as less of a risk – which means better interest rates and payment savings!

People with high credit scores will be big winners as our interest rates rise since they’ll still be able to get the best possible rates on mortgages, credit cards, auto loans, and more. In fact, research shows that a score around the 760 mark usually yields the best possible interest rates on purchase and refinance loans.

Across the U.S., 32.8 million people have FICO scores between 700 and 749, but there are approximately 70 million consumers with FICO scores above 760. Even better, roughly 36.4 million people have scores between 750 and 799 and 38.6 million are in the 800-to-850 range. (Only about 1% of people with FICO scores, around 2 million individuals, ever reach the summit with a score of 800-850.)

 So, if you want to make sure you’re prepared for coming rate hikes, check your credit score and make sure it’s up to par.

It’s important to remember that rate increases aren’t always unexpected, or even unwelcome. In fact, a Fed rate increase is one way to make sure to cool off growth that’s too quick or too high (preventing more bubbles in real estate or the economy). The Federal Reserve is encouraged by strong jobs and unemployment numbers; both main indicators. Therefore, a gradual increase is seen as pivotal to our long-term economic balance and health.

Higher Fed rates also usually correspond to higher savings rates and bond rates for consumers at banks, a healthy stock market, and a good indicator that the U.S economy is running at full steam.

From a real estate perspective, when mortgage interest rates trend up a tick, it’s like pumping the brakes a tiny bit on home buying and equity appreciation. While that may seem like stormy weather for homeowners, it serves as an invaluable balance against the market going up too fast and too high. Without this reality check, or the plateaus of any normalized market, we could face much bigger drops in equity in the future if the housing market gets too hot and comes down all at once.

Additionally, when you track the 30-year chart of interest rates, our current mortgage rates are still extremely favorable and near-record lows.

***

Even if rates rise slightly and gradually, these five ways to prepare will save you a whole lot of money in the long run!