Consumer confidence and spending are on the rise and the unemployment rate is down which means The Federal Reserve is finally raising interest rates. People who locked into a low, fixed rate on a mortgage won’t notice any difference in their payments, but homeowners with adjustable rate mortgages (ARMs) are going to start feeling the pinch which means many people are questioning what to do about paying down their mortgage debt in the face of a rising rate environment.
“As a new home owner, I am thrilled to see my money working for me! Every month I feel like I am putting a piece of my pay check right in the bank. I am excited to be able to pay extra on principal every month so my equity increases quicker than the average payer! My new project this spring is to work on the landscaping and beautifying our new home. Enjoy the extra pleasures that come with being a new home owner!” says Ashlei Randolph, Branch Manager, Contemporary Staffing Solutions.
Pay Down Strategies For Adjustable Rate Mortgages
People with 5-year ARMs need to reconsider their pay down strategy as rates start to rise. Say you took out a $500,000 mortgage with a 5-year ARM of 2.5%, resulting in current monthly payments of $1,975. When that rate adjusts after the 5-year lock, your payments will increase. If the ARM increases to 3.5%, payments will rise to $2,176 per month.
A conservative but effective pay down strategy would be to set aside the $201 difference between the current and future adjusted rate, and then pay a lump sum against the principal when the rate adjusts. That way, you can refinance the loan when it adjusts and achieve similar or lower monthly payments. A slightly more aggressive strategy would be to invest the savings into a high-yield bond that will be paid out in the next year due to rate hikes, or if your risk tolerance is high, put that money into the stock market and bet on a continued bullish environment.
What About Fixed-Rate Mortgages
When interest rates rise, homeowners with low, fixed-rate mortgages should not be concerned about paying off their principal quickly. In fact, homeowners that have been making additional principal payments each month should consider cutting extra payments and investing the difference.
Say, for example, you hold a $500,000 fixed-rate mortgage with a 2.5% interest rate. Your payments are $1,975 per month, but you make an additional $400 principal payment each month to speed up your pay down. Since your rate is protected, there is no need to be aggressive in your pay down strategy. Instead, take advantage of higher rates and invest at last half of that $400 overpayment in high-yield stocks and bonds, boosting your asset portfolio. Nobody can predict the future, but a sensible strategy for maximizing your dollars is the right strategy for staying ahead as rates rise.
Is Your Firm Ready To Handle ARM Refis?
Homeowners with adjustable rate mortgages will likely consider refinancing within the next several years to avoid massive monthly payment increases. Banks and brokerages will need to be staffed with talented mortgage professionals to help manage the flow. If your bank, mortgage brokerage or investment firm is looking for talented financial pros to help you achieve your goals, or if you are a mortgage professional seeking new opportunities, contact the expert recruiters at Contemporary Staffing Solutions today.