First Person: Combating Rising Mortgage Interest Rates

Yahoo Contributor Network

According to a recent CNN Money article, mortgage rates are rising at a record pace. The article notes, "Homebuyers got blindsided by an interest rate hike of more than half a percentage point Thursday, the biggest increase in more than 26 years. Now, many shoppers don't know whether they should scramble for a loan or wait on the sidelines."

With rates still in the 4.5 percent range for 30-year mortgages though, don't expect those of us who have been around the block in the housing market to be shedding too many tears for new buyers. When my wife and I bought our first home, we had a rate near 6 percent with a .5 percent discount for being first-time buyers. My in-laws had a rate in the double digits when they bought their second home in the 70s, so 4.5 percent doesn't sound that terrible to us. This doesn't mean that people should just go throwing money away on higher rates though.

If you are finding yourself freaking out about mortgage rates, you might be wondering how you can combat their rise. Well, it's not necessarily that difficult. We managed to cut thousands of dollars off of our own mortgage with some relatively simple moves.

Buy a better mortgage

One of the first things we did in an effort to avoid higher mortgage rates on our first mortgage was to consider other loan options. One of the first ways we found to knock almost a point off of our mortgage rate was to undertake a 15-year mortgage. Sure, the payments were higher in the near term since we were paying off our mortgage faster, but at nearly a percentage point less in interest rate, the lower rate would save us tens of thousands of dollars in interest compared to a 30-year mortgage -- nearly double what we'd pay for the longer loan's interest in fact.

Put more down

On our first home purchase, we saved for years in order to be able to put a sizeable down-payment on the home. By the time we were ready to buy, we could afford a 40 percent down-payment. In turn, this not only eliminated the need for mortgage insurance, but it also made the size of the mortgage we needed to obtain for our home much smaller. This cut our payments and reduced the amount upon which we had to pay interest over time.

Consider, for every ten thousand dollars we could cut off our mortgage amount, we were saving ourselves over $500 a year. So if that number suddenly became an extra $50,000 in down-payment on the home, our savings would balloon to $2,500 a year -- $37,500 in savings over the course of the 15-year mortgage.

Make extra payments

I don't care what the interest rate on our credit card is. Why? Because we pay it off every month. With our mortgage, we not only paid monthly, but we made extra payments along the way to reduce our mortgage obligation faster. We did this by way of a bi-weekly mortgage payment plan (which in essence helped us make an extra payment toward our loan each year). However, we had to pay to do this. What we should have done -- and what we eventually did -- was just make extra payments on our own.

It was great as we watched our amortization schedule slowly getting cut down, the amount in interest we paid each month starting to decrease with each extra payment we made compared to what we should have been paying had we remained on schedule. In this way, we cut extra hundreds of dollars each year in interest owed off our mortgage.

So if you're worried about rising interest rates, not all is lost. There are still ways to reduce the amount in interest you'll pay on a home over time.

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Disclaimer:

The author is not a licensed financial or mortgage professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.

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