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Whether you’re thinking of refinancing or buying a home, now might be the time to get that loan.
Mortgage interest rates are climbing. This week, mortgage rates for a 30-year fixed-rate home loan climbed to 5.05 percent, according to the Mortgage Bankers Association. That’s a nearly eight-year high.
Mortgage rates may soon move even higher. The Federal Reserve is expected to continue to raise the federal funds rate in coming months. Although the federal funds rate doesn’t directly affect mortgage rates, the two types of rates tend to follow the same direction.
Mortgage rates also generally follow the same direction as the 10-year Treasury note, which has jumped in October.
So, it might pay off to lock in a rate now before home loan costs climb even higher. Here are some steps to follow when shopping for a mortgage.
Keep an eye on interest rates
Even small movements in mortgage rates can make a big difference in your monthly housing costs and in the interest you pay over the lifetime of your loan.
If you plan to borrow $240,000 at 5 percent, your payment will be $1,288 a month, not including property tax or insurance.
If rates rise to 5.5 percent — an increase of a half-percent — your payment will be $1,362 per month. That is an increase of $74 a month, or $888 a year.
You can play with the numbers on a mortgage calculator like this one. But the point is that the more rates rise, the more it increases your monthly costs unless or until you lock in a rate on a home loan.
Use Money Talks News’ mortgage rates page to find the best home loan rate where you live.
Figure out if refinancing will pay off
Will you come out ahead if you refinance? The devil is in the details.
Refinancing to a lower rate lowers a monthly mortgage payment. But it’s only worth it if the month-to-month savings exceed the cost of refinancing. In short, don’t do it unless you’ll stay in the home until you’ve saved more from the lower rate than you paid in refinancing fees.
Your break-even point is easy to compute: Divide your total refinance costs by your monthly savings. The result will be the number of months it will take to break even. Example:
- Total cost to refinance: $2,000 (This includes all expenses and fees, from the initial appraisal to the final closing costs.)
- Monthly savings from lower rate: $100
- Months to break-even: 20
In this example, if we plan to stay in the house for more than 20 months, the refinance will pay for itself. If not, we’ve endured the hassle of refinancing and lost money in the bargain.
Use an online calculator like this one to compute your break-even point.
A lower monthly mortgage payment is always welcome. Refinancing to a lower interest rate should drop your payment. But you can’t be sure, since the details depend on your loan amount, your credit score and other factors.
Learn whether you can get rid of mortgage insurance
If you bought your home with a down payment smaller than 20 percent of the purchase amount, you probably were required to buy mortgage insurance. Private mortgage insurance (PMI) charged on conventional loans can cost 0.5 percent to 1 percent of your loan’s value. Federal Housing Administration (FHA) mortgages include mortgage insurance, too.
PMI adds $41.50 to $83 a month to your payment for every $100,000 of your mortgage. With FHA mortgages and some conventional loans, you have to pay mortgage insurance for the life of the loan — refinancing is the only way out.
However, if you have 20 percent equity in your home when you refinance — whether through your payments or from appreciation of your home’s value — you won’t need mortgage insurance.
Check with your lender to see if your principal payments have exceeded 20 percent of the loan value.
Decide if you want to extract cash
Home values have been rising in most parts of the country. That means you may have more home equity. One way to tap it without selling your home is to refinance and take out cash.
Consider a short-term adjustable mortgage
Thirty-year fixed-rate mortgages are a safe, traditionally popular choice. But an adjustable-rate mortgage (ARM) may meet your needs under certain circumstances — such as if you plan to sell your home before the loan’s introductory low-interest-rate period ends.
ARMs are attractive because their initial interest rates typically are lower than those of fixed-rate loans. But they are riskier: After a fixed-rate period, the interest rate can change regularly. The 5/1 ARM, for example, has a fixed rate for five years. After that, the interest rate can fluctuate each year — possibly higher, possibly lower.
Some ARMs adjust more often — twice a year or even every month. If the rate goes up, your mortgage could suddenly become a lot more expensive.
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