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mortgage rate trend

Mortgage Rate Trend

Mortgage rates are low now, but what do you do when the mortgage rate trend starts rising upwards?

First: don't panic. Mortgage rates are notoriously fickle, following the whims of the bond market. While it's true that interest rates rise much more quickly than they fall, even a sharp jump in one day or week can be erased over the next week or two. The current 30-year fixed rate mortgage, now just over 6% (as we write this), still ranks among the low points of the past several years. Plus, keep in mind that even a one-half percent rise (from 5.5% to 6%) is only a $32/month increase for a $100,000 loan -- and since most of your early payments are tax-deductible interest, you'll recoup some of that on April 15.

Consider another loan product. Today's mortgage market features a wide array of products, from long-term fixed rate (FRM) to short term adjustable rate (ARM). If a 6% 30-year FRM might bust your budget, a 5/1 'Hybrid' ARM will fit the bill. These have a fixed interest rate for the first five years at more than a full percent below the 30-year fixed. That way, you get in at a rate you can afford -- but after that, your rate (and payments) will change annually, so keep an eye on rates and watch for chances to refinance into a real FRM. Or, possibly, into another hybrid ARM; they're also available in 3/1, 7/1, and 10/1 flavors. The longer the fixed period, however, the lesser the interest rate savings.

What about a '2-1' buydown? Buydowns are among the oldest loan gimmicks around. You start with an interest rate that is about two percentage points below the market rate for the first year. After that, the rate steps up by 1% in the second year, then rises again by 1% a final time for the 3-30-years. The catch: The final interest rate usually ends up about one-half percent above today's rates. So, rather than getting 6% today, you get 4.5% in the first year, 5.5% in year two, then 6.5% for the remainder of the loan. Of course, you could refi before that happens if rates go your way.

Pay more points to lower the rate. You can pay additional discount points to lower the interest rate. Each point will cost you 1% of the loan amount, so it's not a cheap option -- but each point you pay should lower your interest rate between 1/8% and 1/4%, depending upon the product you choose. For example: you pay two points ($2,000 on a $100K loan) to lower that 6% rate to 5.5%. You'll reduce your payment by $32 per month, so you'll break even in about 5 years.

You'll probably need some spare cash (say, in a rainy-day fund) to do this -- but the lender may let you instead add the cost to the amount you're borrowing, especially if it's a refinance.

Take a shorter commitment period. One of the lesser-known facets of mortgage pricing (rates) is that lenders offer a wide variety of commitment periods, ranging from 30 days to 60 days and even longer. The committment period is simply the time expected to close the loan, and mortgage lenders often quote an "average" one, like 45 days. If your paperwork is in order, and if your credit record is good, you might be able to close your loan in only 30 days. As a reward, your rate will be slightly lower as a result of the shorter commitment period. This may be worth asking about as lenders get less busy, since closing times may be starting to get shorter again.

Offset the rise in rates with a bigger downpayment. You can still beat a rising mortgage rate trend if you can afford more upfront. That $100,000 mortgage at 5.50% has a monthly payment of $567.78; with a 6% rate, you'll only be able to borrow $94,701, which means you'll need to come up with an additional $6,300 to keep your payment level. If you're cashing stocks to generate your downpayment anyway, you might consider this option.

Get a "floatdown" option. Think rates might be lower by the time you close, but are too afraid to let your rate really "float"? A floatdown option may be the best of both worlds. You can pay a small fee (one-eighth to one-quarter point is common) to have access to lower rates if they fall during your commitment period. Another method sets limits of how high or low your rate can travel during the commitment period, but you may start at a rate that is higher than market to start with (i.e. 6.125% with a floatdown option to 5.75% versus 6% with no floatdown option).

Try a "Second Mortgage" instead. In some circumstances, you might find a local bank, thrift or credit union offering Home Equity Loans at very attractive rates, which you may be able to use to replace your first mortgage. Lenders usually write these loans for their own portfolios, meaning that there are wide ranges of rates in most markets, so you'll need to shop around. Of course, most equity loans aren't made with terms of 30 years, but are usually available in 10 and 15- year flavors, so if you started with a 15-year loan, or if you're deep into your mortgage -- more than ten years in -- you can possibly replace your exising loan at a lower rate or even shorten the term a little with no real rise in monthly payment. Be wary of using a home equity line, though, especially if you think you'll be in this mortgage for a long time. As these are variable rate products, usually tied to the Prime rate, the prospect of higher interest rates in the years ahead makes this a viable option for "holding periods" of three years or less.

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