When interest rates are high, what options do you have as a homeowner?
People think of high interest rates as being unfriendly to the housing market. This is because high interest rates make buying a house more expensive, creating less demand. Also, because rates are higher, refinancing isn’t often appealing. Sometimes, home values fall due to the higher cost of borrowing for would-be homeowners, although how much they fall is due to the particular economic factors at play.
But as a homeowner, what are some important things to keep in mind?
Your mortgage as a buffer against other inflationary expenses
When consumer prices are going up, if you’re in a fixed rate mortgage, your housing costs remain flat. While higher fuel costs may make your energy bills go up, you aren’t at the whims of the rental market where landlords absorb inflationary costs by raising rents.
This puts you in a good position. Any cost that doesn’t go up in a high interest rate, high inflation environment is good news.
Alternatives to refinancing
The interest rate environment right now is not favorable for refinancing, in most cases. But that doesn’t mean you can’t look at other strategies to improve your short- or long-term financial situation as a homeowner.
If you want to increase your home equity, you can consider making extra mortgage payments, and decrease the amount you have left to pay, without having to refinance.
You can also look at recasting your mortgage, which is where you take the amount you owe on your mortgage and recalculate the payments based on the same interest rate you have now, if your mortgage terms allow it.
A flexible strategy if you need to leverage your home equity
If you want to borrow against the equity in your home for a certain purpose, a home equity line of credit (HELOC) is still a viable option during a period of high interest rates. Because it’s a line of credit, you can draw only what you need. If you keep your borrowing at a minimum when rates are higher, you can look to refinance it, or do a cash-out refinance to cover the cost, when interest rates come back down to earth.
Certainly, you don’t want to get “out in front of your skis” by borrowing at too high a rate. In order to avoid this, make sure you are familiar with the structure of the HELOC you are considering and calculate your estimated payments for the amount you’re likely to borrow.
Just because it’s a high interest rate environment doesn’t mean you don’t have options. You can still strategize how to make the most of homeownership and set yourself up for the future, with a little planning.
Do you have questions about your current situation, or goals you want to accomplish but are feeling hamstrung with the economic environment?
I offer a service called a Real Estate Asset Financial Evaluation (REAFE) that helps you make sense of your home as an investment and align your strategy with your goals. Find out more about it.