Seven ways to counter rising mortgage rates
Mortgage interest rates are on the rise and are expected to rise as the year progresses. Lawrence Yun, chief economist of the National Association of Realtors, predicts that the 30-year fixed rate will hit 3.7% by the end of the year. Michael Fratantoni, chief economist of the Mortgage Bankers Association, is a little more pessimistic and thinks rates could reach 4% before 2023. So what can buyers and homeowners who are refinancing do to offset the higher rates? Seven possibilities come to mind.
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- Improve your credit score. According to the myFico Loan Cost Calculator available to consumers at http://www.myfico.com/credit-education/calculators/loan-savings-calculator/, the interest rate on a $200,000 mortgage obtained at New Mexico on January 25 ranged between 3.19% for borrowers with scores of at least 760 and 3.779% for those with scores below 640.
- Make a larger down payment. Increasing the down payment decreases the amount borrowed and the monthly payment. Borrowing $195,000 instead of $200,000 at 3.5% will reduce the monthly payment by $22.00 and save $8,084 in interest over the life of the loan.
- Buy low. Paying discount points will reduce the interest rate for the term of the loan. Points are one-time fees paid in advance. One point is equal to one percent of the loan amount and would be $2,000 on a $200,000 loan. In exchange, the rate will be reduced by one eighth to one quarter of a percent for each point paid.
- Compare the prices. I’ve always argued that lenders are like shoe stores – they’re both retailers. One sells shoes and the other sells money. Just as not all shoe stores offer the same shoes, not all lenders offer the same loans. And, even if two shoe stores sell the same products, they may not sell them at the same price.
- Lock in your interest rate. Locking the rate at the start of the transaction ensures that the rate will not increase during the loan process. Many lenders lock a rate for 30-45 days at no charge and charge around two basis points per day to extend the lock beyond the initial period. A basis point is equal to one hundredth of one percent. Using this formula, extending a hold for an additional 30 days would cost the borrower approximately six-tenths of one percent of the loan amount.
- Reduce the term of your loan. Typically, mortgage rates for 15-year loans are lower than rates for 20- or 30-year loans. According to Freddie Mac, on January 20, the 15-year rate was about three-quarters of a percent lower than the 30-year rate.
- Refinance your loan. Refinancing a loan for a one percent rate difference is a rough rule of thumb, a two percent difference being a no-brainer. Adjustable rate mortgages will start to increase this year, so it might be time to refinance to a fixed rate product. However, refinancing with either type of loan may not be a good idea, depending on how long you intend to keep your current mortgage. Paying off your new mortgage before enough time has passed to recoup the cost of getting the mortgage certainly wouldn’t be worth it.
According to Freddie Mac’s Weekly Primary Mortgage Market Survey released on January 20, the rate on a 30-year fixed mortgage was 3.56%, while its 15-year-old brother was priced at 2. .79%. While some borrowers may be shocked when faced with mortgage rates approaching 4.0%, they may consider themselves much luckier than borrowers who paid 18.45% for their mortgages in October 1981.
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Gary Sandler is a full-time realtor and owner of Gary Sandler Inc., real estate agents in Las Cruces. He loves answering questions and can be reached at 575-642-2292 or [email protected]