If you’ve been following the stock market or just watching the news lately, you are probably aware that the market has been on a roller coaster lately, and certainly not for the faint of heart. Most analysts agree that this has been caused by the very volatile bond market, which controls mortgage interest rates. For the first time in years, there has been significant movement due to the threat of inflation in a strong economy. This has sent mortgage rates to their highest levels in four years.
A little perspective…
There are different ways to look at what’s been happening depending on what your needs are. One thing to keep in mind is that there is no reason to climb out on a ledge; things aren’t nearly as bad as you might think. Although rates have moved up from their historic lows, they are still very low. In general, fixed rates that were in the high threes, currently reside in the mid fours. To put things in perspective, I remember refinancing clients down to the incredibly low fixed rate of 11.75% for a 30 year fixed rate back around 1980, and they were very happy to get such low rates! Don’t live and die with every eighth of a point. A half percent rise on a 30 year fixed will cost you about $30 a month for a hundred thousand dollar loan.
Some ideas to think about…
If you are looking to purchase, keep your monthly payment down by putting down a little more upfront cash. A lower loan to value will give you a lower interest rate. If you can come up with the cash, this is a great option.
Pay a discount point or two at closing to bring down your rate. A point is one percent of your loan amount or $1000 on a $100,000 loan. Points can be included in the mortgage on a refinance. If you hold the mortgage over a significant point in time, you will “pay yourself back” that investment in the initial few years of the loan, but will continue to enjoy the lower rate for the full term of the loan.
Think about an ARM. 5/1 adjustable rate mortgages are about a half percent lower than fixed rate mortgages. After the initial five year term there is the risk of the rate going up based on market conditions, so you’ll have to keep your eye on fixed rates to see if it makes sense to refinance at some point. There are also 3/1, 7/1 and 10/1 programs. The longer the initial fixed period the higher the initial rate. If you don’t plan on holding the property for much longer than the initial period, this may be the perfect solution for you. Keep in mind that you will have to pay closing costs again if you refinance, but they can be included in your loan.
Finally, if you are worried about rates going up and are looking to purchase, you probably want to accelerate your shopping so that you can apply for a mortgage as soon as possible and lock in a good rate. If you are looking to refinance from either a higher fixed rate or from an ARM, the same rule applies. If you are moving from a higher fixed rate, at some point a refinance will no longer make sense, so don’t over shop to get the world’s lowest rate; it might be time to pull the trigger. If you are trying to go from an adjustable to a fixed rate, keep in mind that in a higher rate environment all rates will go up, so the same rule applies.
The bottom line…
Don’t panic! Rates don’t generally move that quickly; there will be ups and downs. However, the reality is that after a decade or more of historically low rates, in a healthy economy, rates will probably find a comfortable place given inflation and other economic factors. Better to be prepared and ahead of the curve so that you can make your decisions wisely. I’m here to help if you need me!
Lester Bleich, New York State Licensed Mortgage Loan Originator 