How Interest Rates Affect Your Mortgage
Considering buying a home, refinancing your mortgage, or applying for a home
equity loan? Watch federal interest rates closely, as shifting rates could make
a significant difference in your home loan options. Interest rates affect the
type of mortgage you choose and dictate when it's wise to make a change.
What type of mortgage rate is best?
When interest rates are rising, a fixed-rate mortgage is usually an ideal
choice, since it locks in the current rate and protects you from future rate
hikes. When rates are falling, an adjustable-rate mortgage (ARM) becomes more
attractive, as its interest rate changes periodically (usually every one,
three, or five years), allowing you to benefit from lower rates.
Some people choose an ARM even when rates are rising because the initial
interest rate on an ARM can be substantially lower - as much as two percentage
points lower than that of a 30-year fixed-rate mortgage. This means you'll pay
less until mortgage rates have increased a full two percentage points. After
that, you'll pay more than a fixed rate.
There are also hybrid ARMs, which have a fixed rate for a certain time period,
typically 3 - 10 years, and then become adjustable. For example, a 5/1 ARM has
a fixed rate for five years, after which the interest rate adjusts annually.
Hybrid ARMs can be the right choice if you're planning to move within a few
years or if rates are likely to rise in the short-term but then flatten or
fall. However, these long-term trends can be difficult to predict.
Does refinancing make sense?
A change in the interest rate trend can make it worthwhile to switch to a
different type of mortgage. When rates are falling, you can save money by
moving from a fixed-rate to an adjustable-rate mortgage, so you can benefit
from the lower rates. If interest rates appear set for a sustained rise,
switching from an ARM to a fixed-rate mortgage can lock in a lower rate and
protect you from higher payments. You can even use cash-out refinancing to
borrow enough to pay off credit card debt accruing at a higher interest rate.
Just make sure that any closing costs related to refinancing don't offset its
benefits.
Should I switch to a fixed rate?
Some ARMs allow you to convert to a fixed-rate mortgage when interest
rates threaten to rise significantly. This is a useful option, since it
protects you from drastically higher payments with less paperwork and expense
than conventional refinancing.
Should I switch to a fixed rate?
If interest rates are rising when you're negotiating your mortgage, it
can pay to "lock in" the promised rate and points while the mortgage is being
processed. This ensures you get the interest rate you've been quoted, even if
the going rate is higher by the time you close. There may be a fee for this
guarantee.
Taking advantage of changing rates requires you to act quickly. Mortgage rates
can rise and fall abruptly - as much as a full percentage point in a couple of
months. Track these moves in the financial section of your newspaper, and be
ready to make the choice that makes sense for you.
Explore your home loan options at HomeLoanCenter.com
now.
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