Planning For Future Payment Shock
I’m speaking to more and more homeowners who are renewing into higher rates, and this typically means ‘payment shock’.
Payment shock is the sudden jump in required Mortgage payment as a result of renewing into a higher interest rate.
A higher Mortgage payment, on it’s own, is usually something a house hold can absorb.
It’s just everything is more expensive—and then a higher Mortgage payment is added to the mix.
Here’s what happens to your Mortgage payment when you renew in into a higher interest rate.
Mortgage Renewal Example #1:
What I’m generally seeing at Mortgage renewal today …
Original Mortgage July 2019: $550,000
Original interest rate: 2.89%
Original amortization: 25 years
Payment: $2,572/mo
Mortgage balance July 2024: $469,112
New interest rate: 4.89%
Remaining amortization: 20 years
New payment: $3,054/mo
Payment shock = $482/mo
Mortgage Renewal Example #2:
What a Mortgage renewal might look like 12-18 months from now. There is a bigger difference between market rates and the clients original rate. Be aware.
*If future rates are lower, the payment shock will be less.
Original Mortgage July 2021: $550,000
Original interest rate: 1.89%
Original amortization: 25 years
Payment: $2,300/mo
Mortgage balance July 2026: $459,664
New interest rate: 4.89%
Remaining amortization: 20 years
New payment: $2,993/mo
Payment shock = $693/mo
Another Basic Example For You …
In general, for every $100,000 of Mortgage you would be renewing, and the difference in Mortgage rate is 1.00% your Mortgage payment will increase by about $45 per month.
Here is a link to my Mortgage calculator if you’d like to run some numbers (<—Link).
Conclusion:
One simple idea to help absorb future payment shock is to slowly increase your Mortgage payment over time.
If I plan to be paying $400/month more in my Mortgage in about 18 months, one idea is to raise your payment by $100 ever 4-5 months.
This pre-pays the principal balance of my Mortgage lower, so I’m renewing a lower Mortgage balance. Win.
This also slowly adjusts my monthly budget with slight payment increases, versus one big payment shock at the end of my Mortgage. Win.
Another simple idea worth of exploring is refinancing on your Mortgage renewal date.
The benefit is there is no Mortgage penalty, and we can reposition home equity to payout high interest debt (if you have any).
This might lower your overall monthly liabilities, despite renewing your Mortgage at a higher interest rate.
I hope this is helpful for you!
Any questions, reach out.
Cheers,
Chad Moore
