New York. NY – If you’re considering buying a home or refinancing your mortgage, don’t wait.  Mortgage rates just hit the highest level since before the pandemic began and more increases could be coming, putting pressure on homeowners and buyers to pull the trigger on purchasing or refinancing.

According to some sources, the annual percentage rate (APR) on a 30-year fixed mortgage rose to 4.000% this week, an increase from 3.175% in January 2022. It’s the highest it’s been since the first week of January 2020.

Inflation in January also hit a new 40-year high, which will contribute to continuous increase of mortgage rates over the next several weeks, even through 2023 and beyond.

With home prices increasing as well – 15% or more than what they were one year ago – first-time homebuyers are feeling the pressure of increasing costs, and new and existing homeowners will also feel the burden of rising mortgage rates.

  • Limited inventory and increasing home prices are making affording a new home a challenge. For example, the monthly principal and interest to purchase the average-priced home with a 20% down payment reached a record high of $1,454, a 32% increase from one year ago. It’s taking nearly 26% of the median household income to make that payment on a 30-year fixed mortgage.
  • The volume of mortgage applications to purchase a home continues to drop each week, last week decreasing 10% from the previous week. WIth fewer applications there is less competition for buyers, but the increase in costs and rates has them second-guessing.
  • Current homeowners are also losing opportunities to secure a lower mortgage rate, and refinance activity continues to drop. Refinance applications now make up only about 56% of all mortgage applications.

So, what does this mean for homeowners and buyers?

With the lowest rates in decades, many homeowners spent the last two years putting more of their budget toward investing, increasing returns at a higher rate. Advantages to this included faster growth, earned compound interest, greater employer matching, and flexibility with the funds. However, investments carry risk, and decrease the speed you’re building equity in your home.

With rates now increasing, homeowners and buyers no longer have the flexibility in their budget to invest over paying down mortgages. It’s important to ask yourself questions like:

  • What is your mortgage interest rate? If higher, prioritize your mortgage.
  • Are you retired or close to retirement? If so, prioritize your mortgage.
  • What is your comfort with risk? Are you a more aggressive investor, or more conservative? If aggressive, prioritize investing. If not, prioritize your mortgage.
  • Are you nearing the end of your mortgage payments? If so, prioritize investing.
  • Do you have an emergency fund? If not, prioritize investing.
  • Do you have other debts that should be paid off first? If so, prioritize investing.
  • Do you need more flexibility with cash? If so, prioritize investing.
  • Are you wanting to build more equity and lower your debt-to-income ratio? If so, prioritize your mortgage.
  • How do you feel about debt? If being debt-free is important, prioritize your mortgage.
  • Are you planning to move soon? If so, prioritize investing.

If you’re looking for an additional opportunity, many homeowners are opting for cash-out refinance options, trying to take cash out of their homes with value increasing.

Pros and Cons of Paying Off Your Mortgage

If you have extra funds, consider the following pros and cons of paying off your mortgage when deciding whether to pay it off or do something else, like invest:

  • Paying off your mortgage helps you grow equity, which can make refinancing easier.
  • Decreasing the debt you owe will lower your debt-to-income ratio, which helps improve your chances at qualifying for a loan.
  • Paying off your debt faster may also qualify you for lower interest rates on other loans or financing.
  • Once your mortgage is paid off, you can use those funds for something else.

On the other hand,

  • Putting those funds toward your mortgage keeps them from being put somewhere else, like investing and growing the funds faster.
  • Once you’ve paid off your mortgage, you’re no longer eligible for the mortgage interest tax deduction.
  • Some loans have prepayment penalties, so you could incur fees.
  • Depending on how far along in the loan term you are, you may not be saving much on interest.

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