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Three Ways Lower Mortgage Rates Can Work For You
J ust when it looked as if mortgage
rates couldn't fall any further, they
did. Rates on 30-year fixed-rate
mortgages (excluding jumbos) hit
an average of 4.3% in September, the
lowest level since 1953, according to
Freddie Mac, and are still hovering
below 4.5%.
Fifteen-year rates are even more mouthwatering:
3.8%. Mind you, those are
averages. The most creditworthy
borrowers can do even better, snagging
rates perhaps a quarter of a percentage
point lower.
So what's in this for you? A lot,
potentially. If you have a credit score of
720 or higher and at least 20% equity in
your home, you might use these crazylow
rates to shorten your mortgage term,
free up cash, or even add to your real
estate holdings, for example.
Whatever you decide, don't wait too
long. “The consensus is that rates will
gradually move up in the new year," says
Frank Nothaft, chief economist for
Freddie Mac. Freddie projects that the
average 30-year fixed will hit 5% by the
end of 2011.
Get Mortgage-Free Relief Sooner. It's
easy to see why more than a quarter of
borrowers today are choosing a 15-year
mortgage, according to analytics firm
Core-Logic, up from about 9% in 2007.
A 15-year lets you save in two ways:
You get a rate that's about half a
percentage point lower than that of a
standard 30-year, plus you can save tens
of thousands by retiring the loan in half
the time.
Let's say you took out a $270,000, 30-
year mortgage at 5.9% when you bought
your house in 2005. You're paying
$1,596 a month in principal and interest
and now have a $250,000 balance.
Let's further assume that you roll $5,000
in refinancing costs into a new 15-year
mortgage at 3.8% (so the loan is for
$255,000). Your new monthly payment
will be a heftier $1,860, but you'll save
more than $147,000 in interest over the
life of the loan.
What if you can't manage the bigger
monthly bite? Refi to another 30-year and
simply pay more in months when you're
able to, assuming you're disciplined
enough to actually follow through with
that plan.
Given that few new mortgages carry
prepayment penalties anymore, kicking
in extra money shouldn't be a problem,
says Keith Gumbinger, vice president of
mortgage data tracker HSH Associates.
Caveat: If you have only a few years left
on your current mortgage, or you plan to
move soon, a refi may not pay off.
Calculate how long it will take to break
even on your closing costs, up to three
years is typical.
Improve Cash Flow. Freeing up cash
may be your biggest priority right now.
Maybe you're trying to replenish your
emergency fund after being out of work,
or you have lots of high-interest credit
card debt to pay off. Maybe your twins
got into Harvard, and you need to cover
some of the tuition out of
current income. Or maybe
you see enough investment
opportunities around that
you want to lower your
monthly payment and invest
the difference.
In those cases, choose a 30-year loan.
Using the previous example, if you
refinance to a $255,000 30-year at 4.4%,
you'll lower your monthly payment from
$1,596 to $1,277. True, you won't save
nearly as much in interest as you would
with a 15-year. But that's not so bad, says
Matthew Keeling, a certified financial
planner in Mashpee, Mass., as long as you
do something smart with the extra $319 a
month you'll save.
Double Down on Real Estate. Do your
retirement plans call for moving to a
house near the beach or a cabin in the
mountains? If you can afford another
mortgage payment, you may want to start
your search now, while rates are in your
favor and prices are depressed. Ditto if
you've been wanting to buy a second
home or an investment property, says
Jonathan Bergman, vice president of
Palisades Hudson Financial Group in
Scarsdale, N.Y.
Assuming you're buying the place as a
true second home, lenders generally
charge the same rate they would for a
primary residence. But if you intend to
rent the place out, even if just for a few
years until you retire and you need rental
income to qualify for the mortgage, it's
considered an investment property.
And mortgage rates on investment
properties are running about a half to a
full percentage point higher.
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