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How can you help clients understand the impact of interest rate changes on their mortgage?

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Interest rate changes can have a significant impact on your mortgage payments and your overall financial situation. Whether you have a fixed or variable rate mortgage, it is important to understand how interest rates affect your loan and what you can do to manage the risk. In this article, we will explain some key concepts and strategies that can help you make informed decisions and plan ahead for interest rate fluctuations.

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1 What are interest rates and how are they determined?

Interest rates are the cost of borrowing money, expressed as a percentage of the loan amount. They reflect the supply and demand of money in the market, as well as the inflation, economic growth, and monetary policy of the central bank. Different types of loans have different interest rates, depending on their duration, risk, and features. For example, mortgages usually have lower interest rates than credit cards, because they are secured by the property and have longer terms.

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Scott B. Dow, CFP, ChFC, CLU, CASL, APMA

Private Wealth Advisor and Managing Director at Ameriprise Financial Services, LLC
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As a planner with many younger clients who are first starting out, this may be of help. First, the monthly payment on a mortgage increases as the interest rate increases. The following are all based on a 30-year fixed mortgage. If you were to borrow $100,000 at 3.25%, the payment would be $435.21. The same mortgage at 7.5%, would be $699.22. This has two effects on a borrower. First, as the rates went up after Covid, the cost of money (the interest rate) went up which means that it takes more of your income to pay the same amount. Since the bank will generally only allow a certain percentage of your income to be used as debt payment, many people who qualified for a $300,000 mortgage in 2022, no longer qualify for a mortgage.

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2 How do interest rates affect your mortgage payments?

Your mortgage payments depend on the interest rate, the loan amount, the term, and the payment frequency. If you have a fixed rate mortgage, your interest rate and payments are locked in for a certain period, usually between one and five years. This means that you are protected from interest rate increases, but you also miss out on potential savings if interest rates drop. If you have a variable rate mortgage, your interest rate and payments can change according to the prime rate, which is the base rate that lenders use to set their own rates. This means that you can benefit from lower interest rates, but you also face the risk of higher payments if interest rates rise.

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Arthur Welch

Designated Broker Superstars Realty
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Don't get sucked into buying a rate down put all your funds on the down payment then when rates come down refinance at a zero cost

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Jim Van Buskirk ?? ??

President at NEXHome Lending A Mortgage Company that puts Home Owners First!
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Most mortgage loans today are fixed for thirty years the longer your loan is fixed the higher the interest rate most people today only stay in their loans around 7-10 years

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Ron Bork

Sales Manager | MLO NMLS ID# 55343
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If you already have a fixed rate mortgage, current interest rates have no affect on your payments until they drop below the rate you currently have. At that point a refinance may make sense but there is no hard and fast rule for when it will make sense as many factors will come into play. If your mortgage is variable, depending when your rate adjusts, your payment will change if the interest rate changed. Rates are elevated these days so paying points to buy down the rate might not save money. Consider the payback period before buying down the rate. If you refinance before the end of the payback period, you won't see any savings. Consider an All in One Loan if 30 years of payments makes you sick to your stomach.

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3 How can you compare different mortgage options?

One way to compare different mortgage options is to use a mortgage calculator, which can help you estimate your monthly payments, total interest cost, and amortization period based on various interest rates and loan terms. You can also compare the annual percentage rate (APR), which is the effective interest rate that includes the fees and charges associated with the loan. The APR can help you evaluate the true cost of borrowing and compare different lenders and products.

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Jim Van Buskirk ?? ??

President at NEXHome Lending A Mortgage Company that puts Home Owners First!
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Always make sure you are looking at the points you are being charged. Many times you will be quoted a lower rate only to find out you are being charged points

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Ron Bork

Sales Manager | MLO NMLS ID# 55343
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Don't fall for the APR trap! APR is based on the full term of the loan so if (when) you refinance before the full term, the APR increases. APR adds the closing costs to the interest so if you have a mortgage for only 5 years, that increases the APR. Compare the interest rate & the lender's closing costs prior to a decision. Is 6.5% & 2 points better than 7% & 0 points? That's only be answered by considering how long you will have the mortgage. If/when we hit a recession, rates will drop. Payback period for the example above is 60 mos. (unless factoring in the tax benefit for the points). 7% is likely better if you refi within 5 years. If you feel 30 years of payments is dumb, consider the All in One loan from my company.

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4 How can you reduce the impact of interest rate changes?

To reduce the impact of interest rate changes on your mortgage and your budget, there are several strategies you can consider. For example, you can choose a fixed rate mortgage if you want stability and predictability in your payments. Alternatively, you may opt for a variable rate mortgage if you want to take advantage of lower interest rates, and if you can afford potential increases in your payments. Splitting your mortgage into different portions with different interest rates and terms is another way to diversify your risk and benefit from both fixed and variable rates. Additionally, increasing your payment frequency or making extra payments can reduce your principal amount and pay less interest over time. Finally, setting up a contingency fund or emergency line of credit can cover unexpected expenses or higher payments in case of interest rate hikes. It's important to review your mortgage contract and options regularly to see if you can renegotiate, refinance, or switch to a different lender or product that suits your needs better.

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Ron Bork

Sales Manager | MLO NMLS ID# 55343
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Trick Question! Would you NOT want to be impacted when rates are falling? Of course, you would. You would not want to be impacted only when rates are going up. But think about this... if it were possible to pay off your mortgage in 10 years rather than 30, would the interest rate have much impact in the 1st place? No it would not. The reason for our fixation on interest rates is because we're agreeing to 30 years of payments! Yes, real estate values & rates are up. But if you earn more money than you spend and have right type of mortgage, you can reduce your interest costs by 50-70% without any change to monthly spending! The type of mortgage needed is a line of credit mortgage...

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5 How can you get professional advice on your mortgage?

Interest rates are complex and dynamic, and they can affect your mortgage in different ways depending on your financial goals and circumstances. That is why it is advisable to consult a professional mortgage advisor, who can help you understand the pros and cons of different mortgage options, assess your risk tolerance and affordability, and find the best solution for your situation. A mortgage advisor can also help you monitor the interest rate trends and market conditions, and advise you on when and how to make changes to your mortgage plan.

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Ron Bork

Sales Manager | MLO NMLS ID# 55343
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I'm about to provide some advice you likely have never heard before. The problem with most mortgage lenders is that they'll say they have a full menu of loan products but they will offer you only long term, amortizing loans. And they all have an inherent flaw... they are close-ended. This prevents paying back the loan aggressively because money paid in cannot be taken back out again. So most people get stuck in a 30 year payment schedule. Do yourself a favor and look into FMLOC's - first mortgage lines of credit. They enable many homeowners to pay their mortgages in full in less than 10 years! They aren't necessarily for everyone but may just be perfect for you. It's important to know all the available options.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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How can you help clients understand the impact of interest rate changes on their mortgage?

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1 What are interest rates and how are they determined?

2 How do interest rates affect your mortgage payments?

3 How can you compare different mortgage options?

4 How can you reduce the impact of interest rate changes?

5 How can you get professional advice on your mortgage?

6 Here’s what else to consider

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