Many homebuyers worry about rising mortgage rates as this could significantly increase monthly payments and accrue additional interest over time.
Still, Ramsey advises buyers who meet all the necessary criteria to go ahead and purchase their dream home, since refinancing rates could potentially come back down at some point in the future.
1. Make a Larger Down Payment
An increased down payment will typically translate to lower mortgage balance and monthly payments, because lenders view your amount put down upfront as less risk to them and hence, cheaper loans will result. They measure risk through loan-to-value (LTV) ratio; with larger down payments making up more of your home’s total value and therefore LTV ratio becoming a key indicator.
Making a larger down payment allows you to avoid paying PMI (private mortgage insurance), which adds significant interest expense and costs money.
Decisions on down-payment size should ultimately be driven by your current financial status and future goals, but if you are able to afford a larger down payment it would likely save thousands over time in both loan duration reduction and locking in lower interest rates.
2. Shorten Your Loan Term
Shortening your loan term can help accelerate repayment and save on interest costs significantly, though typically this results in higher monthly payments.
Many lenders now offer 15 and 20 year loan terms as an easy way to reduce mortgage rate and shorten loan term without incurring refinance fees. Refinancing with one of these options could help lower your rate while shortening loan term significantly.
Shortening your loan term won’t benefit you much if it puts additional stress on your budget, such as if financial hardship (like job loss ) strikes and makes payments unaffordable; to prevent this happening it would be wiser to pursue other strategies, like making a larger down payment and improving credit, before shortening it further.
3. Buy Mortgage Points
If you can afford mortgage points and are certain that you plan to remain in your home long-term, purchasing them could be advantageous. Their upfront cost will quickly be made up by lower monthly mortgage payments; furthermore, mortgage points are tax deductible!
Before making a final decision about buying mortgage points, it is wise to conduct several simulations using a mortgage calculator to see how investing will affect your bottom line.
Alternately, investing your mortgage points funds toward making a larger down payment could make more financial sense. A 20% down payment could help avoid paying private mortgage insurance (PMI), often leading to lower interest rates; plus investing more upfront could save on closing costs and fees associated with your loan.
4. Refinance
Refinancing can be an excellent way to lower your interest rate and monthly payments, as well as total costs, making refinancing an excellent way to reach financial goals faster. Refinancing can also help homeowners change the terms of their mortgage – switching from an adjustable rate mortgage to fixed or cashing out their home by way of cash-out refinancing – though it is essential that any decisions regarding refinancing are carefully considered in comparison with costs involved and possible financial goals that you have in mind before proceeding with refinancing.
As a general guideline, refinancing should take at least two years to recoup its costs and closing fees, so if you plan to sell soon it may not make financial sense to refinance. Still it may be wise to keep an eye on mortgage rates for potential opportunities to refinance. Katherine Watt is a CNET Money writer specializing in personal finance including mortgages and credit cards.