3 Ways to Take the Sting Out of High Mortgage Interest Rates

0
61

To put it mildly, the American housing market has seen a few fluctuations over the last five years. Just when it seemed that the housing bubble of 2008 was squarely in the rearview mirror, the COVID-19 pandemic hit in 2020.

Between historically low interest rates and individuals starting work-from-home jobs that required more space, it was a seller’s market. Homes were being snapped up for tens of thousands above asking price, sometimes with inspections waived. Even those with no intentions of moving took advantage of historically low interest rates and refinanced for long-term interest savings.

In an effort to curb inflation, the United States Federal Reserve has been steadily raising interest rates since March of 2022. In less than a year, interest rates for 30-year fixed mortgages have risen from less than 3% to more than 7%. For those looking to purchase a home, the mortgage interest rates can serve as a major deterrent to becoming a homeowner.

But what if there were ways to lessen the negative impact of high mortgage rates? Here are three ways to keep mortgage interest at a minimum.

1. Look Beyond 30-Year Fixed Rate Mortgages

First time homebuyers might assume a 30-year fixed rate mortgage is likely their most affordable choice. But it can really pay off to look at other options before signing on the dotted line.

Especially with current high interest rates, an adjustable rate mortgage (ARM) could be a solid alternative to a fixed rate mortgage. These loans are typically easier to qualify for and have lower interest rates. Your interest rate will be locked in for an introductory period that typically lasts anywhere from three to 10 years. 

This is especially advantageous if you’re unlikely to be in the home for longer than the introductory period. It can also pay off if you think interest rates will have lowered by the time the rate will adjust. If your gamble pays off, you will have an even lower interest rate later on without costly refinancing.

Another option that might be surprising is a jumbo loan. These loans are for amounts higher than what is approved by Freddie Mac or Fannie Mae’s conforming limits. Benefits of jumbo loans can include no PMI (private mortgage insurance) payments, lower interest rates, or lower down payment requirements. You’ll typically need a strong credit score to qualify for these loans, so take that under consideration.

2. Take an Interest Deduction, If Possible

Ever since the standard deduction nearly doubled in 2017, few Americans itemize their taxes. If you don’t itemize, then chances are you don’t get a benefit from mortgage interest payments. But when can you deduct mortgage interest outside of itemizing your taxes? There are more examples than you might think.

If you run a business out of the home, you can oftentimes deduct a portion of your mortgage interest payments. It can be small — say, if you use one bedroom as an office — or more significant. A good example of when you can probably deduct a bigger interest portion is if you run a home daycare.  

You can also deduct mortgage interest as a business expense if the loan is related to a rental property. In these instances, you might not be as concerned about higher interest rates since you can write off those costs. 

You can even get creative if you’re just dipping your toes into rentals. Let’s say you buy a duplex and choose to live on one side personally. You can still deduct half the mortgage interest if you’re using the other portion as a rental. If you later leave for a different home, you can rent out both duplex units and deduct all interest.

3. Refinance When Advantageous

Even if you buy a home when mortgage rates are sky high, you can get relief later. If you purchase a home with a 30-year fixed mortgage of $300,000 at 7.2% interest, interest adds up quickly. In fact, over the life of the loan you would pay $433,091 in interest for that $300,000 principal. 

But just because your mortgage was at 7.2% interest originally doesn’t mean it needs to stay that way. Let’s say interest rates go down to 6.7% in five years. You could refinance your loan at that time, but you need to consider if refinancing costs are worth the interest advantage. Refinancing costs vary, but 2-5% of your loan principal or around $2,375 is normal.

If you think it’s likely that interest rates will continue to drop, it might be worth it to hold off on refinancing. Paying the fixed 7.2% rate for another year might be worth it if interest rates go from 6.7% down to 4.1%. Refinancing too often can completely wipe out interest rate savings due to fees, so choose your time wisely.

Approach Mortgage Interest With Your Best Interest In Mind

Nobody likes paying mortgage interest. It just means a bigger portion of your monthly payment disappears rather than going toward your principal balance. But even with interest rates being much higher than in prior years, you can still look for the best option. So as you go on your home buying journey, take out the most advantageous mortgage for your situation. 

Was it worth reading? Let us know.