According to Freddie Mac, the average 30-year fixed mortgage rate remains above 7%. When interest rates are high, some borrowers may choose to repay the interest portion of their monthly payments, but this also carries risks.
Bankrate Chief Financial Analyst Greg McBride Joins Wealth! to provide insight into what high interest rates mean for paying off a mortgage.
McBride offers advice to those who are about to pay off their mortgage balance: “Let’s say you’re nearing the end of your mortgage. You only have $10 or $20,000 left in your balance and you’re in a relationship. years before retirement. In this sense, increasing payments can make a lot of sense, because what you are going to do is completely eliminate this payment before you retire, thus giving you a quick return on your investment, significantly reducing your expenses and your retirement.
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This message was written by Nicolas Jacobino
Video transcription
Now, homebuyers are looking to contend with higher mortgage rates, as the average 30-year mortgage rate in the U.S. still sits above 7% here.
According to Freddie Mac, when interest rates are high, some borrowers may choose to pay off the interest portion of their monthly payments to make their monthly mortgage a little more affordable, but this also carries risks.
So to learn more about paying off your mortgage here, I’m joined by Greg mcbride Bank.
Excellent Chief Financial Analyst, Greg.
Thanks to be here.
I mean, tell me about what I just mentioned.
Should consumers who have the ability to repay that interest do that for many mortgage borrowers who settle for 3 or 4 percent rates?
It just doesn’t make sense.
You’re using someone else’s money at such low rates, even if you recently took out a mortgage, say seven or 8 percent.
Um, even then it’s not necessarily in your best interest to expedite payment.
Only a third of American households actually have an adequate emergency savings fund.
Most people are therefore not sufficiently saved for emergency situations.
Pouring more money into an illiquid asset, your home that you can’t access if you need it.
In other words, it’s not necessarily the step you want to take, especially if you can increase contributions to get a tax advantage, retirement savings or pay down other more expensive debts.
Well, tell me about that, Greg.
Let’s say you’re a consumer and your emergency fund is ready to go at this point.
If you pay off the mortgage or if you still say, hey, let me put it in the stock market, better returns there.
Well, look, think about it from a diversification perspective.
You don’t want all of your assets, or even the lion’s share, tied up in your home.
So if you’ve been in your home for a while and you have a lot of equity, you don’t necessarily want to invest more in it and increase your equity further, particularly if you’re not taking full advantage of these savings plans -tax-advantaged retirement.
On the other hand, where it might make sense, let’s say you’re nearing the end of your mortgage, you’re down to your last $10 or $20,000 on the balance, and you’re a few to a few years away retirement, in that sense, increasing the payments can make a lot of sense because what you’re going to do is completely eliminate that payment before you retire, which will give you, uh, a quick return on investment, Significantly reducing your retirement expenses.
Um Another case where paying up front might make sense is if you want to get below a key loan-to-value threshold, say 80%, where you can eliminate private mortgage insurance or put yourself in able to get a better rate when rates fall and you’re looking to refinance.
So I’m curious that there is this idea that you can date the rate based on the mortgage.
You should worry more about the price of the house than the rate because you can always refinance later.
Is this still true?
That is true.
II I think, you know, we expect mortgage rates to go down.
Um And that when that happens, anyone who signed up for a rate at seven or 8% and is going to rush to refinance, we’re still waiting for that to happen.
Mortgage rates have actually increased so far this year.
Um, it’s a little beyond expectations.
I expect they will eventually decline as inflation is brought under control.
Um But this schedule has been postponed a little.
So as these rates come down, I think everyone who’s had a mortgage in the last couple of years will suddenly find themselves in the market to refinance and they might be in the market to refinance. several times if rates were to continue to fall.
And then last question here, Greg, for those of us myself, potentially included here, who just feel like with these rates it’s like it’s not realistic to buy a house at any time in the near future.
What advice do you have to give us?
Well, that might not be in the cards right now.
Um, you know, home prices are high, financing costs are high.
The choice is very limited, it is not the ideal time to buy.
Um, but what you can control, invest in yourself, get that training or that certification that positions you for the next promotion that increases your future earning capacity.
This is what could suddenly make homeownership much more tenable in 12 or 24 months.
Even if house prices or mortgage rates don’t necessarily cooperate.
I like this.
Greg, I should be more interested in the NBA than the mortgage.
I really appreciate.
Thank you very much for joining us.
It was Greg McGbride Bank Rates, chief financial analyst there.
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