With the fear of the inevitable rate increase, many would be first-time home buyers are struggling with the idea of getting into the market, fearing whether they will be able to make their payments down the road should rates rise during their mortgage term. A lot of consumers feel comfortable making payments on their mortgage at a rate of say 3.89% but fear that they may not be able to afford their mortgage come renewal time, in a probable higher rate environment.
A smart thing to do, to help ensure that you can afford your mortgage in 5 years, is to pay down as much of your mortgage principal as you can while interest rates are low. All mortgages are not created equally. Many offer distinct features that if taken advantage of, could end up saving consumers a lot of interest over the life of their mortgage.
One such feature is yearly lump-sum payment options, where the borrower is allowed to make a large payment on principal once every calendar year during the term of the mortgage. Taking advantage of this option, if one is able to, can greatly lower one's interest burden, and help ensure you can afford your mortgage down the road.
Not everyone will be able to take advantage of this option of making a large lump sum payment. But there is another feature that most people can take advantage of, and that is increasing the frequency of payments, to bi-weekly accelerated for instance. Let's look at an example to see how much of a difference using this feature can make.
On a $300,000 mortgage, with a 5 year term, a 25 year amortization with a rate of 3.99%, the payment amounts to $1,576.44 per month. At the end of the 5 year term, the principal remaining on our mortgage is $261,115.89.
By choosing the accelerated bi-weekly payment option, the payments amount to $788.22, and the principal amount remaining is $252,107.48, $9,008.41 less than the principal amount remaining under the monthly payment plan. The amortization is also shortened to 21.8 years, meaning that you are on pace to pay your loan off almost 3 years sooner
From this example it is clear that It does pay to reduce your mortgage principal. Despite rising rates, your principal will continue to get slashed- how fast exactly really is determined by your loan terms and payment plan. An accelerated payment plan can significantly impact the amount of principal you pay down in a 5 year term, which in turn will reduce the total amount of interest you pay over the life of your amortization.
Regardless of whether you are in a fixed or a variable mortgage, by paying as often as you can comfortably afford to do so, you will pay down the principal of the mortgage faster, and build equity in your home, and be in a better position should rates be in a higher tier when it comes time for renewal. These are some steps that can help you ensure you can afford your mortgage in 5 years.
Regardless of whether you are in a fixed or a variable mortgage, by paying as often as you can comfortably afford to do so, you will pay down the principal of the mortgage faster, and build equity in your home, and be in a better position should rates be in a higher tier when it comes time for renewal.
These are some steps that can help you ensure you can afford your mortgage in 5 years.