As of June 25, 2018, we’ve made some changes to the way our mortgage approvals work. You can read more about our Power Buyer ProcessTM.
Most people who buy a home put their mortgage in a drawer – they close on the loan and make their payments every month and rarely think about it beyond that. But what they may not realize is that being in the wrong mortgage for your current situation can hurt you by costing you money.
You may have been living in your home for 20 years with your family or you may be a young couple thinking about starting a family. Or you may have to move every so often due to the nature of your job or because of job transfers. Whatever the case, life changes often so it’s important to review your situation.
How Long Do You Plan to Stay?
You should first ask yourself how long you plan to be in your home. Knowing this will help you figure out whether you should be in a fixed-rate mortgage or in an adjustable rate mortgage (ARM). The average homeowner moves approximately every 10 years, according to the most recent available report from the National Association of REALTORS.
Adjustable rates tend to be lower than comparable fixed rates because investors know that after the fixed period, they adjust to mimic current market conditions. However, there’s a 10-year ARM that you might want to look at if you plan on being in your home 10 years or fewer. The 10-year ARM stays fixed at a lower rate for 10 years before adjusting.
If the answer was more than seven to nine years, then a fixed-rate mortgage could be a wiser choice. You’re protected from market fluctuations. Otherwise, your rate will move to keep up with the market. That said, it’s worth noting that ARMs have limits on how much your rate can adjust upward initially as well as in each subsequent year and over the lifetime of the loan.
If you plan on staying in your home for an even shorter period, five- and seven-year ARMs are also offered. These offer even lower rates in return for less rate security.
Consider Housing Market and Interest Rate Trends
Next, consider what’s going on in the housing market. It’s helpful to pay attention to interest rates at this point.
The Federal Reserve has chosen to raise short-term interest rates four times since they were last at or near 0 in December 2015. They’ve indicated the plan is to continue with this as much is necessary to keep up with inflation. Although not the same, movements in short-term rates do have a correlation with longer-term rates like those given to mortgages.
Another important thing to keep an eye on when it comes to mortgage rates is the Fed’s balance sheet. In response to the last financial crisis in 2008, the Fed bought a bunch of assets in order to stimulate the economy. One thing they’ve done since that time is buy a ton of mortgage-backed securities (MBS). This has had the effect of pushing mortgage rates lower because more buyers in the mortgage bond market mean sellers don’t have to make the yield as high in order to find a willing investor.
The Fed is now debating when to wind down its MBS purchases and begin to sell them off. As the Fed makes its exit, it’s a good bet that mortgage rates will rise unless another buyer steps in and picks up the missing volume.
That’s the quick version. For those of you that can’t get enough, we have this post that goes in-depth on how monetary policy decisions impact mortgage rates.
Your Personal Situation
Third, think about your goals and your situation. For example, if you are a young couple living in a modest house, but are thinking about having children in the next couple of years, consider refinancing to a short-term ARM to lower your mortgage payment until you move into a bigger home that will suit the growth of your family.
What if your goal is to pay off your mortgage as quickly as possible? Then consider refinancing to shorten the term of your mortgage. For instance, if you have a 30-year fixed-rate mortgage, you could refinance to a 15-year term. Since the principal balance is amortized over a shorter period of time, you can end up paying significantly less in interest over the life of the loan.
In summary, traditional thinking has always taught us that your mortgage is best left alone. But with so many different mortgage loan options available these days, it may not make sense to keep the same mortgage at all times. Life will always bring changes and you may save yourself lots of money and headaches by keeping your mortgage in sync with your situation.
If you would like to take a look at your options to get a preapproval to buy a home or even complete a refinance approval, you can do so online with Rocket Mortgage® by Quicken Loans®. If you’d prefer to get started over the phone, you can give one of our Home Loan Experts a call at (800) 785-4788.
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