For about the last eight years, mortgage rates have tended to be extremely low. Since the U.S. presidential election, though, they’ve gone up a little bit. They’re not bad, but they’re higher than they’ve been in quite a while.
Rates may be higher in recent weeks, but that doesn’t necessarily have to mean a higher mortgage payment. If you’re looking for ways to save on your mortgage payment this year, you just have to think a little bit outside the box and take a look at a couple of options you may not have considered when rates were lower.
Think Adjustable Rate
Adjustable rate mortgages (ARMs) sometimes get a bad rap because the rates are beholden to market movements at the conclusion of a fixed-rate period that’s placed at the beginning of the loan and commonly lasts five, seven or 10 years. Because people like payment certainty, they sometimes dismiss the adjustable rate option immediately without considering their situation.
I’m here to tell you not to do that. The rates you can get at the beginning of an adjustable rate mortgage are lower than fixed rates. What’s more, you’re probably not sticking around in that house for 30 years. According to a 2016 profile of home buyers and sellers conducted by the National Association of Realtors, the average homeowner stayed in a given home for a period of 10 years, up from a historical average of six to seven years.
Rates for a 10-year ARM are hovering in the high 3% range at the moment. If you don’t see this as your last home, it may make sense to take a look at an ARM and move on before the rate adjusts. If you end up sticking around, you could always refinance into a fixed rate if it makes sense.
One thing to note is that you may need a larger amount of equity to refinance into an adjustable rate mortgage. This is a sort of assurance for your mortgage’s investor that you have enough financial stability to handle the payment changes.
How Adjustments Work
So we know that ARMs are fixed for a period of time, but when they adjust, how is the new interest rate calculated?
Your interest rate adjusts up or down based on a couple of different indexes, depending on the type of loan you have. If you have a conventional loan backed by Fannie Mae or Freddie Mac, your interest rate adjusts based on the level of the one-year London Interbank Offered Rate (LIBOR). If you have an FHA or VA loan, your interest rate is based on the one-year Constant Maturity Treasury (CMT).
Whichever index is being used, the value of the index on the adjustment date is added to a margin to calculate what your rate will be over the course of the next year. The exact number used for the margin depends on the type of loan you have, but it remains constant for the term of the loan.
Your new payment is based on the remaining balance at the time of adjustment. Your payment schedule is also re-amortized based on the new interest rate so you can have the loan fully paid off by the end of your term.
Another thing a lot of people don’t know about adjustable rates is that even if they move up at the end of the fixed-rate portion of the loan, there are yearly and lifetime caps on how much your interest rate can increase. The amount your interest rate can change in both cases depends on the type of loan you have.
Lengthen Your Term
There are a couple of ways you can use your mortgage to give yourself some financial flexibility and lower your payment so that you can put money toward other expenses.
The first is to refinance in order to take cash out and reinvest it in things like your retirement fund, your child’s college education or home improvements. However, there’s another strategy you can use either alone or in combination with a cash-out refinance.
You can take a look at lengthening your term. By spreading your remaining payments over more years, you can lower your monthly mortgage payment and keep that money for other things.
In lengthening your term, there’s no reason to think you have to start over from zero. Let’s say you have 16 years left on your term and plan to retire in 2037. You can choose to go back to a 20-year term and pay off that last mortgage payment by the time you stop working.
With our YOURgage, you can pick any term on a conventional loan between 8 and 30 years, so you can really tailor the length of the mortgage to your situation.
It’s one thing to save for the college fund, but if your kids are already on campus or in the workforce, maybe you’ve come to the realization that you don’t need the four-bedroom, two-bathroom house anymore.
Now that you’re an empty-nester, maybe instead of having all that house, you can sell and start the next chapter of your life in something a little cozier. This would likely lower not only the principal of your loan but also the taxable value of your home. There are lots of reasons why smaller is sometimes sweeter.
If you’re looking to lower your payment this year, you can get a preapproval to buy or a full refinance approval online through Rocket Mortgage® by Quicken Loans®. If you prefer to give us a ring, one of our Home Loan Experts would be happy to take your call at (888) 728-4702.
Do you still have questions? Let us know in the comments below.
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