Have high mortgage rates ruined your plans to refinance your mortgage?
Well, there might be a temporary solution to save some money while you wait for interest rates to drop again.
Assuming you have the extra money on hand, you can reduce your interest expenses simply by paying more each month until you refinance.
For example, pay an extra $100, $250, or $500 per month and you’ll save interest and lower your loan balance.
In the process, you will lower the effective interest rate on your current home loan and potentially make it easier to refinance later.
You can still save money without refinancing
First, you can save money on your mortgage without refinancing if you pay extra each month.
Let’s consider a simple example where you have a mortgage rate of 7% and a loan balance of $400,000.
The monthly principal and interest payment is $2,661.21. In just one year, you’ll pay $27,871.29 in interest.
Now imagine paying an extra $500 a month to save that interest. Payment is $3,161.21 per month.
After a year, your outstanding balance will be $389,740.45 instead of $395,936.77.
After 24 months, the balance will decrease to $378,739.26 instead of $391,579.82.
Total interest expense for that period will decrease from $55,448.86 to $54,608.30.
That would be about $840 in savings in interest and a lower balance of $12,841.
The cost would be $12,000 (500 x 24 months) for a savings of $1,681. That’s a return of about 14%.
A lower balance may make your refinancing rate cheaper later
Now imagine that rates finally drop to the point where you are “in the money” to refinance. Let’s assume the 30-year fixed slippage reaches 5.5% by then.
If you originally put a 20% down on your home ($500,000 price), your balance may be closer to 75% of your loan-to-value (LTV).
With this lower outstanding balance of $378,739.26, you may find yourself in a lower LTV category. You’ll only need a new appraised value of about $505,000.
Being in a lower LTV group means you are subject to lower loan level rate adjustments (LLPAs).
As a result, your mortgage rate should be lower than everything else. This might mean a rate of 5.375% instead of 5.5%, or perhaps even 5.25%.
Your refinance rate and term just got better, simply because you made an additional 24-month principal payment.
Granted, this would require you to hand over an extra $500 to your loan servicer each month, and if cash is tight, that’s not possible.
But if you have extra money on hand and are disappointed that interest rates haven’t dropped as much as you thought, this is one way to limit the damage from a higher interest rate.
If you only pay your mortgage on time, the assessed value would need to be closer to $521,000 to fall into the lower LTV group.
So it can be a double win in terms of saving some money before refinancing, and enjoying greater savings once you finally refinance.
Read on: How to lower your mortgage rate without refinancing
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