Rates are lowest in over 50 years: Tips to help you get the most for your money
Rates for a 30-year mortgage are now below five percent — the lowest in over 50 years. Whether you’re shopping for a new mortgage or refinancing, you have many products to choose from. “Today” financial editor Jean Chatzky offers some advice to help you get the most for your money.
Think back to 1999. Every time you went to a cocktail party or out with friends for dinner, the topic would turn to stocks, as the participants tried to out-do each other with their soaring shares of Amazon or Ebay. Today, the parties are the same but the conversation’s different. Now you can’t escape the mortgage rate competition. You may have gotten a killer deal at 5 1/2 percent for 30-years, but your next door neighbor’s got you beat at five.
The mortgage market is this year’s little engine that could. Last week, the Mortgage Bankers Association reported — for the first time in more than 50 years — that rates on a 30-year fixed rate loan had fallen, on average, below five percent. Those low rates will drive, the MBA predicts, a record 3.3 trillion in mortgage originations in 2003; 68 percent of that activity, the MBA says, will come in the form of refinancing.
There’s one big difference between the mortgage activity we’ve seen over the past few years (which, themselves, have been far from sluggish) and this year’s: Last year was all about cash-out refinancing, consumers were pulling equity out of their homes (many of which had run up in value) to pay down their credit card debt, pay for college, home improvements or cars.
This year the trend is more conservative. Borrowers are swapping into shorter term mortgages. Instead of taking out 30 year mortgages, with interest rates so low, they’re looking at fixed-rate mortgages with 10, 15 or 20 year terms. Some people are looking at hybrid mortgages, that are fixed for the first five or seven years and then begin adjusting. And some are even getting rid of their conventional mortgages altogether in favor of home equity lines of credit that are a point to a point-and-a-half cheaper in rate with negligible closing costs.
WHY ARE THEY DOING THIS?
Two reasons: One is that rates have fallen so far that if you haven’t refinanced in a while, it may be possible to swap into a much shorter term without impacting your cash flow. But second, despite the fact that we’ve had a nice little run in the market, investors are still opting for safety. A recent Roper survey says that more today than at any time during the previous 26 years, Americans considering the best place to put their money want the safest place, not the place that will provide the most income or the most growth.
HOW DO YOU KNOW WHICH OF THESE SOLUTIONS — IF ANY — IS RIGHT FOR YOU?
To answer that question you need to come back to mortgage square one: How long are you going to be in that house? Are you planning on trading up in a few years when you have kids and earn more money? Are you planning on trading down in a few years when your grown kids flee the coop? Does your company move you every few years? Or is this your home for the foreseeable future?
THE RIGHT LOAN FOR YOU?
Less than three years: Home Equity Line of Credit
If you plan to be in your house for less than three years, you may want to consider refinancing into a home equity line of credit (HELOC). Now, not everyone can do this. In general, to get a competitive rate on a HELOC you can only borrow about 90 percent of the equity in your home — with a first mortgage you can borrow nearly 100. But rates are lower. In just about every market in the country, it’s possible to find a HELOC at 4.25 percent (the current prime rate). Even if rates go up a full point each year you’ll still be around 5-6 percent by the time you get out of this loan. The bigger benefit is the absence of closing costs which can run in the thousands of dollars. Because you’re not in the home for long, you may not have enough time to recoup them.
Three to seven years: Adjustable Rate Mortgage
If you plan to be in your house for three to seven years, look at a hybrid ARM that’s fixed for, say, the first five years then begins adjusting. On a $200,000 loan, your monthly payment on a 5-1 (4.2 percent) would be $979. That’s $140 less than it would be on a 30-year fixed rate loan (five percent) at current rates where the monthly payment is $1,119. Your savings over the first five years of that loan: $11,500. That’s some pretty serious money.
More than seven years: Fixed Rate Mortgage:
If you plan to be in your house for more than seven years, a fixed-rate mortgage is the way to go. Although activity in shorter term loans is creeping up, the 30-year fixed rate mortgage is still, far and away, the most popular product. If you like the idea of a 15, but don’t want to lock yourself into the higher payments, try making one extra mortgage payment a year. It can knock the term of a 30-year loan down to 23 years.
WHAT’S THE BEST WAY TO SHOP FOR ANY OF THESE PRODUCTS?
Personally, I got my most recent deal from a mortgage broker (and it was better than the ones I was offered by banks). But I’ve heard other people tell the opposite tale — and that’s just the way this market works. Sometimes you’ll get the best deal from brokers, other times from bankers, other times online. One thing you should always do is to go back to your old lender and ask about a streamlined refi, which is basically an abbreviated refinance with less paperwork and lower closing costs. But if they won’t give it to you (and we’re seeing lenders tighten up a bit here) you can always go somewhere else.
WILL THESE LOW RATES LAST?
As you know, I think trying to forecast interest rates is similarly tricky to trying to forecast the market. However, the economists I’ve polled at both HSH.com and the MBA believe that rates will hold through the summer, perhaps ratcheting up a quarter of a point but not much more than that. In all though, I think if you run the numbers to refinance and see that you can save enough money to make the hassle of the transaction palatable, you should do it. If rates drop further, you can always refinance again.
