Interest Rates and Mortgages
Are you considering a home purchase, a mortgage refinance or a home equity loan? The best mortgage advice is to watch federal interest rates closely, as shifting rates could make a significant difference in your financing options. Interest rates affect the type of mortgage you choose and dictate when it's wise to make a change.
Mortgage Help with Interest Rates
When interest rates are rising, a fixed-rate home mortgage is usually ideal. These mortgages lock in current rates and protect homeowners 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 adjustable-rate mortgage even when rates are rising: The initial interest rate on an ARM can be substantially lower — as much as 2 percent lower than a 30-year fixed-rate mortgage. This means that you'll pay less until mortgage rates have increased by 2 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 period, typically three to ten years, and then become adjustable-rate mortgages. For example, a 5/1 ARM has a fixed rate for five years, and then 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 a Mortgage Refinance Make Sense?
A change in interest rate trends can make a mortgage refinance worthwhile. When rates are falling, you can save money by moving from a fixed-rate to an adjustable-rate mortgage, allowing you to benefit from the lower rates.
On the other hand, if interest rates appear set for a sustained rise, switching from an adjustable-rate mortgage to a fixed-rate mortgage can lock in a lower rate and prevent 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 mortgage refinance closing costs don't offset its benefits.
Should I Switch to a Fixed-Rate Mortgage?
Some adjustable-rate mortgages 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 a conventional mortgage refinance.
Should I Lock In My Mortgage Rate?
If interest rates are rising when you're negotiating your home purchase 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.
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