How to Take Advantage of Low Mortgage Rates

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Author: Matt Dimler

Between May of 2007 and May 2008, the median price of a single family home in Boston decreased 12%, a fact which reflects a nationwide trend. After many years of a low-inventory sellers’ market, the housing industry has now shifted in favor of buyers, and as such, the reflected interest rates are significantly lower â€" near rock bottom.

While this is unfortunate for anyone who recently bought a home and wishes to turn a profit on it, the current rise in inventory is a blessing for first-time homebuyers, as well as homeowners who purchased their homes when rates were high.

Furthermore, as the federal government attempts to stimulate the economy and encourage people to buy houses (and to help them keep them), rates should continue to stay low.

They will not stay low forever, however, so while the market is ripe, it is important for buyers and owners wishing to capitalize on low rates to do so.

For Homebuyers

As national averages drop, lenders are seeing fewer and fewer adjustable rate mortgages. The fact is, it the potential just isn’t worth the risk. In other words, since rates are already low, choosing an adjustable rate mortgage (ARM) is a real gamble, and will only yield a few fractions of a percentage point in the end, if it yields any profit. However, because ARMs often come with lower APRs to start, this might be a viable option of a buyer who plans to sell the house in a year or two.

To really take the most advantage of low national mortgage rates, homebuyers should seek to lock in on a fixed interest rate somewhere around or below 5%.

In addition to obtaining low fixed rates, homebuyers should seek to buy down those low rates as best they can in order to receive a lower final annual percentage rate (APR) that they will carry for the entire duration of the loan.

Convertible mortgages offer buyers a third option when comparing mortgage rates, and afford holders both the freedom of an ARM and the security of a fixed.

A convertible fixed rate mortgage offers buyers the option to adjust the rate of the loan between the second and the fifth year of the term by adding an extra quarter to three-eighths of a percent to the mortgage’s established interest rate and paying an additional quarter to three-eighths of a percentage point at the time of closing. A convertible ARM allows homebuyers to convert their ARM to a fixed rate 15 or 30 year loan usually between the second and fifth year of the term for a fee of about $250 and approximately 1% of the loan. Both convertible options will allow new buyers to start with a low rate and get a feel for the market before deciding on one rate for the life of the loan. For Current Homeowners Anyone who bought their home before the housing bubble burst most likely has a larger than necessary interest rate on their present mortgage. Even most ARMs are capped on how much they are able to reduce. For homeowners that feel they are paying much more in interest than they should be, now could be the time to refinance in order to capitalize on the lower national average rates. Before refinancing however, homeowners should be sure that the benefits outweigh the pitfalls. Some loan agreements charge penalties for refinancing. All will cost from 3-6% of the loan’s remaining balance, and all require fees incurred for inspections, title work, applications, and other costs usually associated with first-time mortgages. For a homeowner with a capped or un-capped ARM, this is a good time to refinance. By the midway point of a 30-year loan, the market will likely flip, or at least lean, toward a sellers’ market again. By capturing low interest rates now, homeowners can save tens of thousands of dollars. The same is true for high APR fixed interest rates. Generally, the heuristic is that refinancing should reduce your rate at least two points if it is worth doing, however, some experts say that one point is sufficient. The real point to consider is whether or not you plan on staying in your home long enough for the lower-rate refinance to affect you. Because rates are so low, a refinancing homeowner is likely to break even on their refinance much sooner than they would if rates were even just a little bit higher. Therefore, now is doubly a good time to refinance if you hope to move, but plan to stay in your home at least another year. How to Ensure the Lowest Rate Whether you plan on taking out a first mortgage or refinancing an existing one, it is always wise to shop around and get as many quotes as you need to feel comfortable with making a decision. Most importantly, don’t refinance just to do it, or because rates are low. Do the math and see how much money is actually being turned around. Also, as a homebuyer, don’t take out a shorter-term loan because rates are low. You will end up paying more per month and, should the national economy shift, these higher payments may be too much to handle. Customize your mortgage to make it work for you and you will save more money in the end.

Matt Dimler is a freelance writer who writes about a variety of topics including mortgage rates.