Declining Rates Benefit New Homebuyers in 2024

NEW YORK – Mortgage rates may be declining, which puts new homebuyers in a better position than just a year ago.

The 30-year fixed rate mortgage hit a high of 7.79%n in late October 2023; now, we're seeing this type of mortgage at an average of 6.38% (forecast for the fourth quarter of 2024). If you bought a home last year, it's probably too soon to think about refinancing, but have you considered the benefit of making extra payments to lower your interest amount and shorten the term of your loan?

The good news is that mortgage amortization calculators are available online, so you can test making extra payments and see the benefits that can result. Thanks to the mathematics of compounding, you don't have to make big sacrifices to make a significant impact on your debt.

Here is an example, using an online mortgage amortization calculator. In this case, I'm using one found at calculator.net.

Say you have a 30-year fixed mortgage at 5.5% with a balance of $250,000. Your regular payments would be $1,419.47. In 30 years (Oct. 1, 2054), you will have made 360 payments of $1,419.47 for a total of $511,010. Of that amount, you would have repaid the $250,000 loan and paid the bank interest of $261,010. What if you added just $100 extra to that monthly mortgage payment each month, making it $1,519.47? You would pay off your $250,000 debt four years and five months earlier, saving yourself $44,877 in interest payments.

Of course, the more you add as an extra payment, the bigger your savings.

If you were able to make an extra payment of $500 a month ($1,419.47 plus $500), you would save 13 years and five months of payments and $129,580 in interest payments. Your total interest payments would be reduced from $261,010 to $131,430.

Another alternative is to make occasional payments. Say you receive an annual bonus check each January. For the next three years, each January, you pay an extra $10,000 to the bank. That cuts approximately $90,000 off your interest payments and saves you seven years off your loan, so that your loan would be fully paid by October 2047, using the Extra Payments Calculator provided by Freddie Mac. But, if you wait to use those $10,000 bonus payments until January 2034, 2035 and 2036, your savings will be about one-half less – only $48,860, saving you four years and seven months instead of seven years in the earlier example, illustrating the time value of money.

You will probably find a good prepayment calculator at your bank's website. If not, you can call your bank to ask them to illustrate some prepayment options for you considering your particular loan.

Worth considering? Absolutely. Lowering your personal debt is the name of the game in today's financial marketplace. Making small sacrifices today can reap huge savings over the long term.

Who shouldn't make extra payments? Someone with high-interest-bearing consumer debt. If you are carrying credit card debt at high interest rates, pay that off first. Then tackle your mortgage.

Who else? If by chance you are not contributing to your 401(k) plan at work even though it has a match (I hope that's not you), it's better to put extra cash at work there first.

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