How to Handle a Higher Mortgage Payment

Let’s say you’re in the market to buy a house.

The house costs $400,000 and you are going to put 20% down.

You are going to need a mortgage for $320,000 to make up the difference.

Why Interest Rates Are So Important

A year ago, had you bought that house you probably would have an interest rate around 3%. Today that rate is closer to 7%.

The chart below shows the difference in interest you would pay on a $320k mortgage at different rates.

Assuming Homeowners Insurance of $50 each month and monthly taxes of $267, at a 3% rate your payment for principal and interest would be $1349. Your total payment would be $1667 every month.

Today that same mortgage would cost you $2129 in principal and interest and $2449 every month.

That is a difference of $9360 EVERY YEAR!!!

What Should You Do?

It is easy to feel overwhelmed when something like this is out of control.

But there are steps you can take to fit the payments into your budget.

Step 1 – Payoff Small Balances

Think of all the debts you currently have. Are any of them really small?

Paying off a loan that has a smaller balance, but a larger payment could help increase cash flow in the short run.

Student loans or car loans that you have had for a few years and are near the end of their term are great examples. You may have a year left on your car loan that costs you $300 a month. It likely has a balance around $3500. Paying off that balance gives you another $300 of wiggle room.

Step 2 – Cancel Subscriptions

Maybe you have a gym membership you don’t use. Or maybe you have every streaming service under the sun but only use one or two.

Whatever it is we all have something we could cut out of our budget and not miss.

The average American spends $273 each month on subscriptions. Decreasing this to $200 each month will save you roughly $900 a year.

Step 3 – Increase Insurance Deductible

Your deductible is what you pay for before your insurance company pays their share for a claim.

Take a look at your deductibles. Especially for car insurance. Increasing your deductible from $500 to $1000 can save you $10-$20 every month.

Assuming you are a safe driver and don’t get into an accident that is pure money saved!

Step 4 – Refinance at a Later Date

Mortgage rates are high now, but they may not stay high forever.

You could still buy your house now and refinance the mortgage when interest rates come down.

Be warned though – this may take time or never happen at all. It is imperative that you still be able to handle your mortgage payment at the higher rate. Then take advantage when rates do come down. But remember there is no guarantee.

Step 5 – Wait

It never makes sense to buy a house and be strapped for cash afterwards. You will never truly be happy in that home because it will limit your options financially.

If this is the case you find yourself in, wait. Wait until you can save a higher down payment. Or wait until rates come down. Or until you can pay off some other debt to free up your monthly income to direct towards your mortgage.

Just please wait if you think the buying the house today will strap you for cash tomorrow.

Final Word

It is definitely frustrating that housing costs are increasing.

A year ago, a mortgage on a $400,000 home was $700 cheaper than it is today,

Follow the first 4 steps above to make room in your budget for the higher payment.

If you think that you will still be strapped for cash, follow step 5 and wait.

How are you handling higher housing costs? If you need advice with handling your own payment, please let me help.