If you’ve been paying attention to the markets recently, you know that mortgage rates have risen. We got comfortable with rates in the 3.5 to 3.625 percent range, and those numbers have jumped up to 4.125 percent (as of publication). Considering that the Federal Reserve Board could raise the federal interest rate during December, you shouldn’t expect these numbers to drop down anytime soon.
Let’s just say that financial sectors, including the mortgage market, don’t like surprises. And the result of the November elections were a surprise. This isn’t to suggest either Trump or Clinton have better policies, but the markets were planning on a Clinton victory. There are many questions about the former’s future policies…and as long as there are questions, lenders will always play it safe. Playing it safe means higher interest rates.
We’re not looking to predict the future; we’re just going to show you how you can get the best rates possible in the current market. And remember: Although today’s rates seem terribly high compared to the summer, we’re actually just going back to normalcy. In fact, the current rates are still much better than in recent years (compare them to the 16.25 percent rates of 1981!). So consider these tips in both the long and short term.
I. Put More Money Down
It’s always tempting to put as little money down as possible when you get a home. After all, 20 percent of the home’s value is intimidating no matter how low the mortgage rate. Paying off as much of the home as you can is simply the best way to combat high mortgage rates, however.
Think about it: The more you put down on a home, the less you’ll need to borrow. For example, if you put 3 percent down on a $200,000 home at 4.125 percent, you’ll pay $338,500 across the life of the loan. If you put the full 20 percent down, you’ll pay $279,000 in total. Sure, that means paying $34,000 more upfront, but it saves you nearly $60,000 in the long run. And, to add to the benefits, putting down more than 20 percent will save you the cost of mortgage insurance.
If that seems like too much cash upfront, consider getting a cash gift from a relative to put toward the down payment.
II. Buy Discount Points
If putting a full 20 percent or more down on a home is just too much for you right now, you can also find savings through buying discount points from your lender.
A discount point is worth 1 percent of your mortgage total, and typically takes .25 percent off of your mortgage rate. So let’s say you put 3 percent ($6,000) down on the home listed above. You could pay your lender $3,880 for two discount points, which would lower your rate from 4.125 percent to 3.875 percent.
Now, this plan will only save you money if you stay in the home long enough for the savings to cancel out what you paid upfront. You can figure this out by dividing your upfront payment by the amount you save on your monthly mortgage payment. In this case, you would save $28 a month. The math indicates you would need to live in the home for 139 months (or 11.5 years) for the plan to pay off. So if you plan on moving soon, don’t try this! But If you see yourself in the same home 30 years from now, you’ll be reaping the savings for the last 18 years of your mortgage!
III. Get An Adjustable Rate Mortgage
This is another option that can work well for those who plan on staying put for a long time. There are some risks involved, however.
An Adjustable Rate Mortgage, or ARM, is a loan that features a rate that fluctuates from month-to-month, depending on the market. That said, most ARMs begin with a period featuring a fixed rate. Some lenders will even allow fixed periods as long as 10 years.
Let’s say you get a 5/1 ARM (this means the initial rate will be fixed for five years). A benefit to this option is that your initial rate is often lower than a Fixed-Rate Mortgage of the same value. We’ll assume you lock in a 4 percent rate for five years (as opposed to 4.125 percent). After that five year period is over, you have two options:
This is a risky maneuver, however. Do the math in advance to consider how much you’ll owe after your initial fixed rate period. Is it realistic that you’ll be able to pay off the rest of the principle on the home in 15 years, including interest on the refinanced mortgage? This can get confusing quickly, so speak with a lender to get a better estimate for what this plan will require on your part.
IV. Close on The Home Faster
If nothing else, the best thing you can do is to ensure you get today’s rate before it has the chance to get any higher. This will require a rate lock.
You can lock in your rate for 15, 30, 45 or 60 days. Locking in your rate will cost you a small percentage increase—the longer the lock, the higher the rate. Aiming to close in 30 days and locking in for that total is a safe bet.
If you’re feeling daring, you might even be able to get your rate decreased by locking in for just 15 days. But remember that if you don’t close during that period, you’ll be penalized. Check out our guide for closing on time to make sure that you beat the clock!
There are plenty of options, so speaking with your lender is your best bet for finding the best approach.
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