It’s a turbulent time for the markets, especially regarding wildly gyrating interest rates.
I’ve shared some of my favorite strategies to profit in this type of environment. But finding the right investment amid the turmoil is only half of the battle. There are also smart steps you can take to save money when it comes to your personal finances.
Let me lay out a couple of ways in which I think you can benefit.
Take your home mortgage. Chances are if you waited to refinance earlier this year, you’re out of luck for now. Rising rates have likely made it uneconomical. But there are still ways you can save mortgage money. One is to check whether your lender will remove your Private Mortgage Insurance, or PMI.
If you put less than 20% down to buy your home, you’re probably paying PMI. It’s insurance that protects your lender … not you … from losses if you default. The cost varies depending on how high your loan-to-value (LTV) ratio was at the time you got your mortgage, as well as other factors. But it can easily run to as much as $100 to $200 a month.
|There are several ways to save money in this interest-rate environment.|
You mortgage company will eliminate PMI automatically once you pay your loan down to 78% of the home’s original value. Or you can request they do so once you pay it down to an LTV 80%. But that can take years due to the way mortgage loans are amortized. As you may know, in the early years of a 30-year loan, most of your payment goes toward interest, not principal. That means your principal balance declines only gradually.
Here’s the thing, though: Home values have appreciated in most of the country over the past few years. That’s certainly true here in South Florida, where my wife and I signed a new construction purchase contract more than three years ago. So I checked with my mortgage company this spring to see what their requirements were for waiving PMI much sooner.
Turns out, I could get PMI eliminated as long as I had made 24 payments since origination … had no 30-day late payments in the last year … and a new appraisal confirmed the property had appreciated enough that I was below the 80% LTV level. I met all the criteria. So I sent in the form, let the appraiser do his thing, and voila — now my wife and I will save around $125 a month, every month, for as long as we have the loan.
Another strategy worth considering: Fixing the rate and payment on a portion of your home equity line of credit (HELOC), if you have one. HELOCs are variable-rate loans where you access as little or as much of your home’s equity via check or linked card over time.
Issuance of these loans slowed to a trickle during the housing bust. But it has gradually been picking up over the past couple of years, thanks to rising home values and the slow easing of credit standards.
Most HELOC rates are tied to the prime rate, which in turn, is linked at the hip to the short-term federal funds rate. So your rate probably hasn’t changed because the Fed hasn’t raised the funds rate in almost a decade. That’s true even though rates on longer-term loans like 30-year mortgages, which follow longer-term bond yields, are already climbing.
But that’s all in the past. If the Fed follows the bond market’s lead and starts to raise short-term rates, then the HELOC rate you’re paying will rise, too. That will increase the cost of servicing any outstanding debt on your line.
Before that happens, check with your bank to see if it allows you to “fix” the rate on a portion of your outstanding balance. Many banks offer that feature for a minimal fee — one you could more than earn back in lower interest costs over time.
These are just a few of the strategies that make sense in this rate environment. There are plenty more of them, which I’ll be talking about more in the weeks ahead in order to maximize your savings as well as your investment returns. So stay tuned!
Until next time,