Ask Farnoosh: Best Ways to Reduce Mortgage Payments

Billy writes: Do you think housing prices will drop once interest rates go higher?
 
Conventional wisdom may lead us to think that when interest rates rise, housing demand takes a dip and prices will subsequently fall. But experts who keep their eyes on the real estate market don’t believe prices are headed south, thanks mainly to steady demand.
 
“The threat of rising interest rates means that wannabe home buyers are worried about waiting too long and missing the affordability window,” says Ilyce Glink, author of “100 Questions Every First-Time Home Buyer Should Ask

” and publisher of ThinkGlink.com. “We're seeing a tremendous amount of what economists call pent-up demand. There were a lot of folks who wanted to buy homes but who just sat on the sidelines waiting. Now that it looks like interest rates are going up, these folks are jumping off the fence in order to take advantage of what are still extremely low interest rates.”

[Click here to check home loan rates in your area.]
 
Taking a historical perspective, when Fannie Mae examined mortgage rates since 1990, researchers found that rising interest rates had little direct effect on home prices.
 
Since May, average national rates have climbed almost an entire percentage point to 4.32% for a 30-year fixed mortgage, according to Zillow.com. That’s still historically low and can afford home buyers a comfortable mortgage payment. And remember, when rates go up, it’s often a sign that the economy is strengthening, which means greater employment and more consumer confidence, an environment that can better support higher real estate prices.
 
Jason writes: Are there any other ways, besides paying more toward [mortgage] principal, to lower your interest rate?
 
Just to clarify, putting more money toward the principal doesn’t lower your interest rate. It does, however, reduce the amount of interest you’ll pay over time since you’ll be shortening the life of the loan with bigger payments.
 
Another way to reduce your interest payment is to refinance the loan. With rates creeping higher it may be more challenging to find an attractive rate today, but you should shop around. Refinancing only makes sense if your monthly savings from the new rate can quickly outweigh the closing costs. For example, if it costs $1,000 to refinance and the new rate saves you $50 a month, it will take 20 months for you to break even. After that, you’ll begin to save money and as long as you plan to live in the house longer, you’re in the black.
 
That said, if you plan on living in the home for decades, just make sure a refinance doesn’t reset the borrowing clock and cost you more in the end. “If you are presently five years into a 30-year loan, then you have 25 years of payments left. Refinancing for 30 years – even at a lower interest rate – may not save you money overall,” says Thomas Pinkowish, author of “Residential Mortgage Lending, Principles and Practices” and president of Community Lending Associates. “You’ll be making an extra five years of payments on the money and you need to consider that in your comparison.”
 
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.