Tired of renting? "Almost" ready to buy a home?
The combination of rising home prices and interest rates* are causing many would-be home buyers to shy away from the Boston real estate market. While the sales market is beginning to show signs of softening, buyers’ motivation is still thwarted by the higher interest rate. What’s more, with the anticipation of rising rents in Boston as a result of these and other macroeconomic conditions, it seems like there is no way out.
While we can’t really influence the macroeconomic effects of rising interest rates, YOU as would-be or current home owners do have the power to save money by reducing your mortgage interest paid throughout the life of the loan.
To get an accurate picture of how much you may actually save, the fastest way is to ask your lender or loan officer to provide you with a few payoff scenarios. For the purpose of illustration, let’s assume you have a 30-year mortgage of $250,000 with a 5% interest rate. For the life of the loan, you’ll be responsible for a $1,342.05 monthly principal and interest payment, and $233,133.89 of which will be in interest alone. Er… What? That’s why one of your financial goals should be to reduce as much mortgage interest paid as possible, and paying a little extra can pay off big!
1. Pay an additional 1/12th of your mortgage payment every month
Benefit: In the example above, adding $111.84 to your monthly payment will shorten the term of your loan by 4 years and 8 months, all while saving you $42,000 in interest!
2. Pay an additional $50 per month towards your mortgage
Benefit: This small amount will save you over $21,000 in interest and will take over 2 years off the end of your loan.
3. Make one-time lump sum payments when you can
Benefit: If you find yourself with a little extra money after a yearly bonus, a tax return, or from investment dividends, paying that money towards the principal can cut your costs.
I am not offering you some mind-blowing secrets to save big on mortgage interest. However, these are sure-fire ways to not fall victim of rising borrowing costs.
Here's a common challenge: Knowing how to save money usually isn't enough to get us to actually take steps to save money right? In fact, I can already hear some of you say “Yes…but I can’t afford to…” “Yes, but I always forget to…” “Yes, but I need to maintain a social life…” “Yes, but it’s such a pain to mail that extra check…” The truth of the matter is, when we don’t want to do something, we can come up with plenty of “Yes, buts.” But consider how little power we have when we frame ourselves within the confines of “yes…but…” as if there is no way out. Kind of like brain-cuffing yourself. Pretty absurd right?
So what should you do? GO PAY IT DOWN! That’s it! Little by little. Start with $50, $100 or $200 a month. Start somewhere. Here are some simple things you can do:
1. Set up automatic payments in your online banking to pay “principal only”. Your bank will take care of the rest.
2. Set a calendar reminder to call your lender once a month to make that extra principal payment. Nobody likes to get on customer service calls. So reward yourself with a small treat!
3. Write twelve post-dated checks for principal-only payments. Put each in a stamped envelope. Drop one in the mail each month.
Bottom Line
Higher interest rate shouldn't be a deterrent to buying your first, second or forever home. Waiting for a "better" housing market will cost you more money in the long-run if continue to rent. A $2,500/month rent equals $30,000 a year down-the-drain. You see - It all adds up!
*As of January 7, 2019, Freddie Mac reported interest rate at its 8-month low. An even better reason to buy now!
The information contained, and the opinions expressed, in this article are not intended to be construed as investment advice. Rachel Lura does not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Rachel Lura will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.