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Does Your Low-Rate Mortgage Have You Feeling Stuck? Don't Worry - You Have Options

Many homeowners are feeling “locked in” by ultra-low mortgage rates offered during the height of the pandemic. When mortgage interest rates hit historic lows in 2020 and 2021, swarms of Americans took advantage. Millions of people bought new homes or refinanced to score rates of 3% or less.

But now that interest rates have shot up and curbed the feeding frenzy, both buyers and sellers face a challenging market in 2023. If you're happy where you are, great. You can simply ride out the market shift until rates go back down. 

But if you're ready to sell, you may be feeling trapped, especially if you’re retired or approaching retirement. A move will mean a new loan with a much higher interest rate (Bankrate puts the current average mortgage loan rate at 7.20%). 

If you’re in this camp, you’re not alone. And you do have options that won’t completely derail your financial plans. Read on to learn more.

What Happened to Mortgage Rates?

Through most of 2020 and 2021, 30-year fixed mortgage rates hovered between 2.5% and 3.5%. Following a downward trend since 2018, rates hit their lowest point in nearly a decade.

However, mortgage rates took a sharp turn in 2022. Starting the year at 3.22%, they more than doubled, peaking at 7.08% in November. The main culprit was, of course, inflation. As the Fed scrambled to fight rising inflation, consumers have seen rates raised more than 10 times in the past 18 months.

Inflation is cooling off, but interest rate increases might not be over. The Fed has indicated they plan to raise rates two more times in 2023.

How Rising Mortgage Rates Affect Monthly Payments

A few percentage points might not seem like a big deal. But rate increases can have a huge impact on monthly payments.

For example, take a $500,000, 30-year fixed-rate mortgage:

  • At a rate of 3%, your monthly payment would be $2,108
  • At 7%, you’re looking at $3,327 each month

That’s approximately a 60% increase. And in real dollar terms, most people don’t have an extra $1,200 budgeted for their monthly mortgage payment.

Five Options for Homeowners Feeling Stuck

If you’re locked into a low-rate mortgage but looking to move, it’s easy to feel trapped. Here are four options to move into a new home without breaking the bank.

1) Move to an Area With a Lower Cost of Living

Relocation is a popular option for retirees. You may have chosen your last home based on school districts or proximity to work. But as those factors become irrelevant in retirement, you have more freedom to move around.

Many suburban and rural areas have lower housing prices and costs of living. And taking out a smaller loan means your monthly mortgage payment won’t go up—and might even drop. For example, a 30-year, $300,000 loan at 7% will have a monthly payment of $1,996, lower than a $500,000 loan at 3%.

2) Look at Smaller Homes

Many retirees also choose to downsize in retirement. As kids move out on their own, you may not need as much space. And having a huge yard to care for becomes more of a burden than a benefit.

Much like relocating, downsizing to a smaller home can mean a smaller loan and monthly payment. Condos and townhouses, in particular, can be cheaper alternatives without sacrificing quality of life. Yes, you’ll have to pay homeowners’ association (HOA) fees on top of your mortgage. But you’ll also have access to amenities that can save money elsewhere, such as gyms and landscaping.

3) Remodel Your Current Home

If you’re looking for more space, consider remodeling your existing home instead of moving. You might convert unused space into a bedroom. Or if possible, build a new addition.

Home equity lines of credit (HELOCs) have rates higher than mortgages, averaging around 8.5%. But remodeling costs far less than a new home. For example, a $20,000 HELOC loan, paid off within 10 years, would have a monthly payment of roughly $350. That’s a lot easier to manage than a $1,200 mortgage payment increase.

4) Make a Larger Down Payment 

When rates are low, using long-term credit is beneficial. But as rates rise, taking a smaller loan leads to considerable savings. If you have the funds available, consider making a larger down payment to reduce the amount of your loan. For example, putting an extra $50,000 down will reduce your monthly payment by almost $350 and save nearly $120,000 over the life of a 30-year loan at 7%.

5. Try ‘Porting’ Your Mortgage

Porting your mortgage means transferring the terms of your existing mortgage over to a new property. Not everyone will qualify for this option, but it can be a game-changer if you’re in the market for a new home right now. 

Whether you’re eligible will depend on your lender, the type of mortgage you currently have, and how the amount of your mortgage compares to the value of the home you intend to buy (the asking price should be equal to or higher than your current home loan). 

Keep in mind, you’re basically reapplying for your current loan. So, your credit score, ability to repay, and other checks will again come into play. To see if you’d qualify, start by talking to your existing mortgage lender. 

Mortgage Rates and Your Long-term Financial Plans

Buying a new home is the single biggest transaction most people will make. But it’s only one part of your long-term financial plans.

Rising interest rates can make home purchases harder, but not impossible. Along with the options above, factor in how the home fits into your overall finances.

For example, moving into a new house downtown might increase your mortgage payment. But if it means you can get rid of a car—along with its monthly payment, insurance, and gas costs—would it be a net benefit?

As you mull your options, consider talking to a professional, such as a Certified Financial Planner. They’ll take a holistic view of your finances and help you understand your options. Together, you can determine what’s best for your family’s financial future.

Want to learn more about building a resilient retirement plan to prosper through rising interest rates and market shifts? Download our Essential Retirement Guide today.

Disclosure: For informational and educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. Certain information is based upon third-party data which may become outdated or otherwise superseded without notice. Third-party information is deemed to be reliable, but its accuracy and completeness cannot be guaranteed. Indices are unmanaged baskets of securities and are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio nor do indices represent results of actual trading. Information from sources deemed reliable, but its accuracy cannot be guaranteed. Performance is historical and does not guarantee future results. Total return includes reinvestment of dividends and capital gains. Neither the Securities and Exchange Commission (SEC) nor any other federal or state agency have approved, determined the accuracy, or confirmed the adequacy of this article. By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements, or representations whatsoever by us regarding third-party websites. Wealth Legacy Institute is not responsible for the content, availability, or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products, or services available on or through these third-party websites. The opinions expressed by featured authors are their own and may not accurately reflect those of Wealth Legacy Institute®.

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