In the context of history, they’re still relatively low, but mortgage rates are about half a point higher than they were before the 2016 presidential election.
If you were in the market to buy a house before, it’s still a good time to get one now. If you’re looking to refinance to shorten your term or take cash out, there’s no reason not to go through with it.
However, in a rising interest rate environment, you may choose different options than a standard 30-year fixed-rate mortgage. Loan options you may not have previously considered start to make sense.
This post will go over some more options that can really make sense when rates go up.
Consider an ARM
The interest rate of an adjustable rate mortgage (ARM) is fixed for a given period of time at the beginning of the loan. 5-, 7-, or 10-year fixed periods are common.
An ARM only adjusts up or down according to market forces upon the expiration of its fixed period. The rate adjusts every 6 months to a year after that, and there are caps on how much the rate can go up or down.
It’s also important to think about how long you’re going to be in the home. Consider this: According to the National Association of Realtors® “2016 Profile of Home Buyers and Sellers,” tenure in homes is at an average of 10 years. Although this is up from a historical average of six or seven years, odds are many of us won’t be in the same house long enough to make the final payment on a 30-year mortgage.
With that in mind, you could take advantage of the fixed-rate period on a 10-year ARM to get a lower rate than you would on a fixed-rate loan if you know you’ll likely be selling the house by the time it adjusts.
One thing to note regarding ARMs is you have to bring a down payment of at least 10% to the closing table. This is one way investors in mortgages ensure that you have the resources to handle it if the payment adjusts to a higher rate.
Shorten Your Term
If your goal is to pay less interest, you can also take a good look at shortening your term. You’ll pay a higher monthly payment every month, but you’ll end up spending less money over the life of the loan.
This works because mortgage investors are willing to give you a discount on the interest rate in exchange for having the loan paid off faster and seeing the money in their pockets.
Shortening your term also doesn’t mean automatically going to a 15-year mortgage. Here at Quicken Loans, we have something called the YOURgage. This is a fixed-rate mortgage where you can pick any term you want between eight and 30 years.
This opens up several options for you. Let’s say your child has just been born and you want to pay off your house by the time they go to college. You can choose an 18-year mortgage. Once it’s paid off, you might put the money you save toward their tuition.
Buy Discount Points
If you’re looking to get a lower interest rate, another good way to do that is to pay for mortgage discount points. The way this works is you put up a certain amount of your mortgage interest upfront in exchange for securing a lower interest rate.
One point is equal to 1% of the loan amount. You can buy these discount points in increments down to 0.125% of your loan amount.
You really have to determine whether buying points makes sense for you. A lot of it depends on how long you plan to stay in the home. Let’s say you’re buying a $150,000 house. Purchasing one point will cost you $1,500 at the closing table. In exchange, you might be saving $30 per month on the payment. You would need to stay in the home 50 months to break even on the deal ($1,500/$30). For every month you stay in the house past that time, not only do you have a lower monthly payment, but you’ve now saved money on interest over the life of the loan.
Interest rates may be rising, but that doesn’t mean there aren’t still great mortgage options out there. If you think you’re ready to get started with a purchase or refinance, you can go ahead and get going online. If you’d prefer to speak with one of our Home Loan Experts, you can give us a ring at (888) 728-4702. If you have any questions, leave them in the comments below.
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