When you obtain mortgage financing to purchase a property, you will typically be required to pay a certain amount of interest every month. The mortgage can come with a fixed rate interest or a variable rate. A fixed rate is based on a specific percentage of the total mortgage amount, and it remains the same throughout the term of the loan. However, a variable mortgage rate oscillates according to current market conditions.
Some people prefer a variable rate because it can go down for certain periods of the loan term, lowering your monthly payment amount. But what happens when there is a temporary spike in the interest rate? It's important to be financially prepared to handle higher monthly payments when the interest rates go up.
Here are a few tips to ensure that you don't default on your monthly payments during these periods.
Pay attention to interest rate fluctuations
The best way to handle a variable interest mortgage is to stay on top of interest rate fluctuations. You should have a basic understanding of factors that affect mortgage interest; such as a growing local real estate market, new legislation in the industry, or improvements in the local economy.
By anticipating interest rate changes in advance, you can be prepared to handle your new monthly payments. In particular, high demand for properties in your market can increase mortgage rates and result in a spike in your payment amount. If you foresee this trend in your area, you can take steps such as paying off a few months in advance to ensure that you lock in your current lower rate before it increases.
Reduce your debt-to-income ratio
Debt to income ratio is a comparison between how much money you owe and how much you make each month. When taking a variable mortgage rate, you should ensure that you earn more than what you owe every month. This will give room in your budget for any unexpected fluctuations in the payment amount.
You can lower your debt-to-income ratio by reducing credit card debt, car payments, and other loans that you may owe.
Keep some cash reserves available
Before you obtain a variable rate mortgage, it is always a good idea to keep cash reserves that can handle at least two monthly payments. This will give you a cushion to handle interest rate changes that you may not have foreseen as you plan how to handle future payments.
Avoid borrowing money during interest spike periods
If you expect the interest rate to increase in upcoming months, avoid taking on new debt. Taking up car payments or opening a new credit card can interfere with your budget moving forward.
If you have more questions about mortgage financing, contact local solicitors.