How A Rise In Interest Rates Will Affect Your Car Loan Payments
Suppose you have a car loan of $10,000 with a fixed interest rate of 5.5%. You have three years left in your term. Your monthly payments are $302.
Your monthly payments won’t increase if interest rates rise because the interest rate on your loan is fixed. However, if you have to put more money toward other loans when interest rates rise, you may have difficulty with, or may no longer be able to make, your car payments.
If you need to renew or renegotiate your loan, your loan payments may increase if interest rates rise.
Dont Forget About Refinance Closing Costs
Remember, refinancing replaces an existing mortgage with a new one. And the new home loan will have its own set of costs which youre responsible for, too.
These are lender and third-party fees that range from 2% to 5% of the loan balance. A sample of closing costs when refinancing include:
- Loan origination fees
- Recording fees
- Other mortgage-related expenses
Make sure you factor in closing costs before refinancing a mortgage loan. Ideally, you should keep the home long enough to break even or recoup what you pay at closing.
So if refinancing reduces your mortgage payment by $250 per month and you paid $5,000 in closing costs you should own the property for at least an additional 20 months to break even with your upfront cost and start seeing real savings.
Transferring To Another Provider
If you donât want to renew your term with your current lender, you can also refinance your mortgage with another provider. When you refinance your mortgage, you are essentially taking out a new mortgage with a new lender and using that money to pay off your old mortgage with your old lender.
Refinancing has the benefit of helping you secure the lowest possible mortgage rate and allows you to apply for a larger mortgage than what you hold with your current lender, as long as you have sufficient equity in your home to do so. The extra money from the larger mortgage would be advanced to you as cash, which you can spend on home improvements, post-secondary education, debt consolidation, and more.
The downside of refinancing is that it is an entirely new mortgage with a new provider, and the mortgage application process is demanding. Youâll also pay extra fees, including:
- Setup fees with the new lender
- Fees to discharge your old mortgage and register your new mortgage
- Transfer or assignment fees from your current lender
- Appraisal fees to confirm the value of your property
- Administration fees
In some cases, your new lender will cover some of the costs to refinance.
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Can You Pay Off Your Mortgage Early
In most cases, you can pay your mortgage off early without penalty but there are a few things to keep in mind before you do.
First, reach out to your loan servicer to find out if your mortgage has a prepayment penalty. If it does, youll have to pay an additional fee if you pay your loan off ahead of schedule. This can affect whether paying your mortgage off early is financially viable for you.
Second, make sure there arent any restrictions on how and when you can make additional payments. Some loans have terms that encourage you to follow the payment schedule, and its important to ensure that whatever extra payment you make goes to the principal and not interest.
When Making Minimum Monthly Payments Works
It may not be a good idea to focus on paying off your mortgage early if you have other debt to worry about. Credit card debt, student loan debt and other types of loans often have higher interest rates than most mortgages. This means that they accrue interest faster.
Youll save more money by paying these debts down than you would if you put all your money toward your mortgage. Its best to sit down with your financial paperwork and compare interest rates of your other debts to your mortgage interest rate. If your other debts have a higher interest rate, you should pay them down first.
You also may want to avoid paying your loan off early if it carries a prepayment penalty. This is a fee your lender charges if you pay off your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest.
This means that if you pay off your principal very early, you might end up paying the interest you would have paid anyway. Prepayment penalties usually expire a few years into the loan.
Consult your mortgage lender and ask about any prepayment penalties on your loan before you make a large extra payment. Prepayment penalties are also noted in your mortgage contract.
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What To Do If You Cant Afford Your Mortgage Payment
If your mortgage-payment struggles are part of an overall problem with your finances, look for ways to trim your spending. Establish, or re-establish, a budget, being mindful but realistic about where you can trim spending.
If youre choking on your mortgage payment as a result of the coronavirus shutdown, you have options, especially if you have a federally backed loan. Under the Cares Act, loans owned by Fannie Mae and Freddie Mac, or guaranteed by the Department of Veterans Affairs, Department of Agriculture, and the Federal Housing Administration, must grant deferred or reduced mortgage payments for up to six months, plus an additional another six months upon request.
Check with the Consumer Financial Protection Bureau for guidance about how to manage your mortgage if coronavirus has knocked your finances off a cliff, and you cant afford your bills.
Otherwise, get a strategy. Prioritize your bills. Create and stick to a budget. Investigate areas of additional income. Contact your lenders.
Look to your utilities for savings. Theres low-hanging fruit in your water, electricity, and gas usage.
If youre bailing as fast as you can but youre still taking on water, consider involving a . These are experts trained to help folks evaluate their debts theyve seen worse than yours make recommendations, and sometimes create a debt management plan that charts a course to a smooth-sailing future.
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How To Pay Off A 30
There are a few ways to pay off a mortgage sooner than the 30-year term.
Options to pay off your mortgage faster include:
- Pay extra each month
- Pay off other debts
There are advantages to each approach. The choice comes down to careful study and a decision based on your financial position and ability to repay what will be higher monthly payments.
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Not Considering All Of Your Options
It can be very tempting if you come into some extra money to put that toward paying your mortgage off ahead of time. However, getting out of debt a little bit earlier may not be the most remunerative choice to make. To illustrate this, lets look at an example.
Lets say youre considering making a one-time payment of $20,000 toward your mortgage principal. Your original loan amount was $200,000, youre 20 years into a 30-year term, and your interest rate is 4%. Paying down $20,000 of the principal in one go could save you roughly $8,300 in interest and allow you to pay it off completely 2.5 years sooner.
That sounds great but consider an alternative. If you invested that money in an index fund that represents the S& P 500, which averages a rate of return on 9.8%, you could earn $30,900 in interest over those same 10 years. Even a more conservative projection of your rate of return, say 4%, would net you $12,500 in interest.
Everyones financial situation is unique, and its very possible that the notion of being out of debt is so important to you that its worth a less than optimal use of your money. The important thing is to consider all of your options before concluding that paying off your mortgage earlier is the best path for you.
Preparing For A Rise In Interest Rates
Pay down debt as much as possible to prepare for a rise in interest rates. If you have less debt, you may be able to pay it off more quickly. This will help you avoid financial stress caused by bigger loan payments.
Here are ways to prepare for a rise in interest rates.
- Cut expenses so you have more money to pay down your debt
- Pay down the debt with the highest interest rate first so you pay less money towards interest
- Consider consolidating debts with high interest rates, such as credit card debts, into a loan with a lower interest rate but keep your payments the same
- Avoid getting the biggest mortgage or line of credit that you’re offered
- Consider how borrowing more money could limit your ability to save for your goals
- Find ways to increase your income to help you pay down debt
- Make sure you have an emergency fund to deal with unplanned costs
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Theres No Down Payment To Refinance But You Do Need Equity
When you buy a house, theres almost always a down payment requirement usually between 3% and 20%. The down payment is required because it puts equity into the home, which protects the lender in case your loan defaults.
When you refinance, you dont need to make a down payment because you already have equity in the property. Remember that you build home equity over time as you pay down your mortgage and the home increases in value.
So, as long as you meet minimum equity requirements, you dont need to bring a down payment to the table when you refinance.
But you do need to pay closing costs again just like when you bought the home. So you should plan for those upfront fees when .
Refinance To A Lower Rate
Refinancing a 30-year loan makes sense if the interest rate is lower than what you have now. If you took out a mortgage before the recession, you likely have a higher rate than what’s available now.
If you don’t want the higher payments of a 15- or 20-year loan, a 30-year loan will offer a lower interest rate and lower payments. However, it won’t help pay off the loan quicker unless you make higher payments, such as if you had a 15-year loan.
This can make sense if your income might drop or some family emergency happens. You can make higher principal payments until – if ever – you lose your job or the money is needed elsewhere.
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Apply For A Mortgage Loan Modification
If youre experiencing long-term financial hardship, then asking for a loan modification might help lower your mortgage payments. Your lender might restructure your loan by extending the loan term, reducing your interest rate, or reducing your principal balance.
What If I Make Two Extra Mortgage Payments A Year
If making an additional payment on top of what youd already be paying extra through a biweekly schedule or committing to one annual extra payment is a feasible financial option for you, doing so can be a great way to gain full ownership of your home even faster.
However, you should only consider this option if it wont put your ability to pay for your other financial responsibilities at risk.
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Benefits Of A Lower Monthly Mortgage Payment
The main advantage of lowering your monthly mortgage payment is that allows you additional household cash flow that can be used for several things, says Cindy Laffey, branch partner and mortgage planner at Inlanta Mortgage in Pewaukee, WI.
Laffey explains that saving on your mortgage can allow you to:
- Pay off other higher interest rate loans and credit cards faster
- Build a nest egg of savings for unexpected expenses and home repairs
- Increase savings for education and/or retirement
- Better managing increasing costs for property taxes and homeowners insurance
If you need some extra cash flow each month for these reasons or any other refinancing your mortgage could be a huge help.
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How To Make An Early Payoff Of Your Mortgage A Reality
I know all of these options sound great in theory.
The problem though is that you need more money in order to pay extra on your mortgage each month.
As it stands now, money is already tight.
What can you do to earn extra money and pay off your mortgage faster?
There are all sorts of ideas out there.
You can learn about many ways to earn more money either through side hustles or even how to make more money at work by reading through the posts in the build wealth section of this site.
Just by cutting a few monthly expenses and doing a little work on the side could easily bring in $250 extra each month.
It may seem like a small amount, but it makes a big difference in the long run.
If you combine some of the tricks to pay off your mortgage faster and can put this extra $250 you earn towards your mortgage each month, you could pay off your mortgage in 10 years.
This is what I use to get a quick look at our net worth and investments.
The reason I do this is for motivation.
- Read now:
There are times when you would rather buy something you want instead of putting the extra money towards your mortgage.
But then I log into my Personal Capital account, see the progress we made and how close we are getting to being mortgage free and it helps to get me excited again.
So I highly recommend doing this as well.
You can open your free account by clicking the link below.
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Switch From An Arm To A Fixed
When used wisely, an ARM can be an effective home loan option. Just be sure you know when the interest rate is scheduled to fluctuate. ARM rate changes tend to move upward, resulting in higher monthly payments for you. A good way to avoid this is to refinance out of the loan as youre nearing the end of the initial fixed-rate period.
Ensure you’re getting the best advice with these mortgage refinancing tips.
Purchase A Home You Can Afford
If you want to finance a home, youll need to get prequalified first, writes Mike Timmerman, who paid off his mortgage in just two years. The bank will look at your overall financial picture and spit out an amount that youre likely to get a loan for. Some people use this number to set a housing budget, but not me.
The bank is just guessing. I examined my monthly budget and determined what I wanted to spend on housing, Timmerman adds. It ended up being much less than what the bank told me I could afford.
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Pour Every Bit Of Extra Cash Into Your Mortgage
Dedicate every windfall a bonus, raise, or holiday or graduation gift you receive toward paying down debt, recommends Marilyn Lewis in Money Talks News.
Obviously, the highest-interest debt takes priority. But if you have an adequate emergency savings fund and your mortgage is your only debt, dont even ask yourself what youll do with extra money when it falls into your hands: Add it to your mortgage payment, designating it as additional principal.
When Balancing Early Mortgage Repayment And Other Financial Responsibilities Works
You should have a robust household emergency fund before you think about paying extra cash toward your mortgage. An unexpected auto bill, medical expense or other cost can upset your budget if you dont have any liquid cash.
While its possible to take cash out of your home equity with a refinance, this process takes time, which you may not have in an emergency. Make sure you have plenty of money set aside for emergencies before you put any extra toward your mortgage loan.
You may want to put off paying off your mortgage if you have another big expense coming up. Your priority should be putting money into your 401 or IRA. You might also want to consider diverting your extra money into a childs college fund or into savings for an upcoming vacation or wedding.
Theres no point in paying off your mortgage if it means going back into debt in the future.
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Refinancing To Shorten The Loan’s Term
When interest rates fall, homeowners sometimes have the opportunity to refinance an existing loan for another loan that, without much change in the monthly payment, has a significantly shorter term.
For a 30-year fixed-rate mortgage on a $100,000 home, refinancing from 9% to 5.5% can cut the term in half to 15 years with only a slight change in the monthly payment from $805 to $817. However, if you’re already at 5.5% for 30 years , getting, a 3.5% mortgage for 15 years would raise your payment to $715. So do the math and see what works.
Choose Your Debt Amount
Buying a house has never been cheap, but lately, its become more challenging for potential homebuyers to lock in an affordable place to call home.
If you already own a home, paying off your mortgage early can offer benefits like increased cash flow and interest savings. Building equity in your home is enticing, especially for first-time homeowners, however, the rise in housing costs will influence your strategy to pay down your mortgage early.
As of February 2022, housing prices have jumped by nearly 20% from the previous year, and Fannie Mae predicts costs will climb by another 11.2% by December.
However, getting out from under a monthly mortgage payment 15 years earlier while building equity in your home faster, could still be enticing, especially for first-time homeowners. Once that mortgage debt is wiped out, money used there could be moved to retirement savings or college savings for children.
And then there is the tax benefits of owning the home, which should not be ignored. The more careful the process and analysis, the better informed you can be.
Anyone who is uncertain can find help through a nonprofit credit counselor, who could offer advice on your equity, debts and financial plan.
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