According to Freddie Mac, the average 30-year fixed mortgage rate is holding steady above 7%. When interest rates are high, some borrowers may choose to pay down the interest portion of their monthly payments, but that also comes with risks.
Bankrate Chief Financial Analyst Greg McBride joins Wealth! to give insight into what high interest rates mean for paying down a mortgage.
McBride offers advice to those close to paying off the balance of a mortgage: “Let’s say you’re getting down toward the end of that mortgage. You’re down to your last 10 or $20,000 on the balance, and you’re a couple of years away from retirement. In that sense, stepping up the payments can make a lot of sense because what you’re going to do is you’re going to completely eliminate that payment before you retire, giving you a quick return on investment, drastically reducing your expenses and retirement.”
For more expert insight and the latest market action, click here to watch this full episode of Wealth!
This post was written by Nicholas Jacobino
Video Transcript
Now, home buyers are looking to navigate higher mortgage rates as the average US 30 year mortgage rate still sitting above 7% here.
That is according to Freddie Mac, when interest rates are high, some borrowers may choose to pay down the interest portion of their monthly payments to make their monthly mortgage a little bit more affordable, but that also comes with risks.
So for more on paying down your mortgage here, I’m joined by Greg mcbride Bank.
Great chief financial analyst, Greg.
Thank you for being here.
I mean, talk to me about what I just mentioned.
Should consumers who have the ability to pay down that interest be doing that for a lot of mortgage borrowers that are walking around with the three or 4% rates?
It just flat out doesn’t make sense.
You’re using somebody else’s money with rates that low, even if you did take a mortgage recently say seven or 8%.
Uh even then it may not necessarily be in your best interest to accelerate payment.
Only one third of American households actually have an adequate emergency savings fund.
So most people are under saved for emergencies in that sense.
Pouring more money into an illiquid asset, your home that you can’t get to if you need it.
That’s, that is not necessarily the step you want to be taking, particularly if you can be increasing contributions to tax advantage, retirement savings or paying down other higher cost debt.
Well, talk to me about that, Greg.
Let’s say that you’re a consumer that’s got your emergency fund ready to go at that point.
Should you pay down the mortgage or still say, hey, let me put it in the stock market better returns there.
Well, look, think of it from the standpoint of diversification.
You don’t want all of your wealth or, or even the lion’s share of your wealth tied up in your home.
So, if you’ve been in your home for some period of time and, and you have a lot of equity, you don’t necessarily want to be pouring more uh into that and growing your equity stake further, particularly if you’re not taking full advantage of those tax favored retirement savings plans.
On the other hand, where it can make sense, let’s say you’re getting down towards the end of that mortgage, you’re down to your, you know, your last 10 or 20,000 on the balance and you’re a couple of years away from retirement in that sense, stepping up the payments can make a lot of sense because what you’re gonna do is you’re gonna completely eliminate that payment before you retire making, uh, giving you a quick return on investment drastically reducing your expenses in retirement.
Uh Another instance where paying ahead can make some sense if you want to get yourself below a key loan to value threshold, say 80% where you can eliminate private mortgage insurance or put yourself in a position to get a better rate when rates drop and you look to refinance.
So I’m I’m curious then there’s this idea out there that you can date the rate by the mortgage.
You should worry more about the home price than the rate because you can always refinance later on.
Is that still true?
It, it is true.
II I think, you know, we’re, there’s this expectation that mortgage rates are going to decline.
Uh And that when that happens, anybody who took out a rate at seven or 8% that they’re gonna be storming in uh to, to refinance, we’re still waiting on that to happen.
Mortgage rates have actually gone up so far this year.
Uh That’s kind of defied expectations.
I do expect that they will eventually come down as inflation comes under control.
Uh But that timetable has been put off a bit.
So as those rates come down, I do think you’re going to see anybody who’s taken out a mortgage over the last couple of years, they’re suddenly going to be in the market to refinance and they could be in the market to refinance multiple times if rates were to continue dropping.
And then last question here, Greg, for those of us myself, potentially included here who just feel like with these rates, it’s just like not on the table realistically to be buying a home anytime in the near future.
What advice you have for us?
Well, it might not be in the cards right now.
Uh You know, home prices are high financing costs are high.
The selection is very limited, not a great time to buy.
Uh, but what you can control, investing in yourself, getting that training or certification that positions you for that next promotion that increases your future earnings capability.
That’s what could suddenly make homeownership much more tenable 12 or 24 months down the road.
Even if home prices or mortgage rates don’t necessarily cooper.
I like it.
Greg, I should look into the NBA more than I should look into the mortgage.
Really appreciate it.
Thank you so much for joining us.
That was Greg mcbride Bank Rates, Chief Financial Analyst there.
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