Did those higher mortgage rates ruin your plans to refinance your mortgage?
Well, there might be a temporary solution to save some money while you wait for interest rates to move lower again.
Assuming you have the extra cash on hand, you can reduce your interest expense by simply paying more each month until you refi.
For example, pay an additional $100, $250, or $500 per month and you’ll save on interest and knock down your loan balance.
In the process, you will reduce the effective interest rate on your existing home loan and potentially make it easier to refinance later.
You Can Still Save Money Without a Refinance
First off, you can save money on your mortgage without refinancing if you simply pay extra each month.
Let’s consider a simple example where you’ve got a 7% mortgage rate and a $400,000 loan balance.
The monthly principal and interest payment is $2,661.21. In just one year, you’d pay $27,871.29 in interest.
Now imagine you pay an extra $500 per month to save on that interest. The payment is $3,161.21 per month.
After a year, your outstanding balance would be $389,740.45 instead of $395,936.77.
After 24 months, the balance would drop to $378,739.26 instead of $391,579.82.
Your total interest expense for that period would fall from $55,448.86 to $54,608.30.
That’d be about $840 in interest saved and a balance that is $12,841 lower.
The cost would be $12,000 ($500×24 months) for savings of $1,681. That’s a return of roughly 14%.
A Lower Balance Could Make Your Refinance Rate Cheaper Later
Now imagine rates finally fall to a point where you are “in the money” to refinance. Say the 30-year fixed slips to 5.5% by that time.
If you originally put 20% down on your home purchase ($500,000 price tag), your balance could be closer to 75% loan-to-value (LTV).
Using that lower outstanding balance of $378,739.26, you could find yourself in a lower LTV tier. You’d only need a new appraised value of around $505,000.
Being in a lower LTV bucket means you are subject to lower loan-level price adjustments (LLPAs).
As a result, your mortgage rate should be lower all else equal. That might mean a rate of 5.375% instead of 5.5%, or perhaps even 5.25%.
Your rate and term refinance just got even better, simply because you made an extra payment to principal for 24 months.
Sure, it requires you to hand over an additional $500 to your loan servicer each month, and if cash is tight, it’s not doable.
But if you do have extra money on hand and are disappointed that rates haven’t fallen as you thought they would, this is one way to limit the damage of a higher interest rate.
If you were just paying the mortgage on schedule, the appraised value would need to be closer to $521,000 to fall into that lower LTV bucket.
So it could be a double-win in terms of saving some money before you refinance, and enjoying even greater savings once you do eventually refinance.
Read on: How to Lower Your Mortgage Rate Without Refinancing
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
