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One more shot at a low mortgage rate
Reuters
Posted February 04, 2004
WASHINGTON - As the Pointer Sisters say, jump.
Mortgage rates fell two weeks ago and now sit lower than they have in many months. Except for a brief dip last spring, that's as low as they've been for many years.
The traditional 30-year fixed rate loan is at 5.28 percent, reports Bankrate.com. That means homeowners who thought they'd missed the boat when rates spiked late last year can still line up a low-cost loan. But a recovering economy will eventually push those rates back up, so ... jump.
Especially you procrastinators who missed the last long wave of low rates and are still sitting on mortgages at 7 percent or higher. Consider this crater a reprieve.
But even people who already refinanced in the last year or so might find some reason to go back to the mortgage market. Here are some strategies to consider:
• Improve the quality of an interest-only loan. Squeezed home buyers who locked in during last fall's rate spike may have gone to unhealthy lengths to qualify for their loans. For example, many new borrowers went for interest-only loans. Those hold payments down in the early years by deferring any principal payments the borrower might make and requiring only interest payments for the first five to 15 years.
But that's not a good loan for the borrower. You can pay and pay and pay, and still end up owing the entire mortgage. If the house price boom slows, or you live in a part of the country that sees home price declines, you could end up owing money at settlement when you sell the house. Refinance now and get a more traditional loan, so you'll be paying off your house from the beginning.
• Borrow money you'll need soon. Looking at college in the next five years? The current rate for parents', or PLUS, loans is 4.22 percent, but it's variable and might be significantly higher by the time your child matriculates. To get those loans, you have to file detailed financial aid forms, and you can't always deduct the interest.
But a 15-year home loan now runs 4.5 percent. You can lock that in, tuck the money away (safely!) until it's needed and then start paying off the college bills before they come in. It's also a good time to borrow money for that addition you think you'll build in the next year or so.
• Dump PMI, maybe. If you just bought a home and paid less than 20 percent down, you're probably paying private mortgage insurance to the tune of $40 to $75 a month for a $100,000 loan. If your house has appreciated enough since then, and you now own 20 percent of the equity, you qualify for a loan without PMI. But your lender is unlikely to give it to you if you haven't been in your home for two years and if the appreciation alone put you over.
Refinancing will save you that bill, but isn't always worth it, says Keith Gumbinger of HSH Associates, a Pompton Plains, N.J., research firm. Your own lender must automatically drop your PMI when you pay your loan down to 78 percent of equity. And the money you spend refinancing could offset the PMI savings. Ask your lender to drop PMI first. Then find another reason to refinance, and make sure the new loan does not require PMI.
• Consider an ARM. The multiyear skid to historically low interest rates has caused most homeowners to lock in fixed-rate mortgages, and that's a sound, smart strategy. But lenders now have big holes in their portfolios where those adjustable rate mortgages used to be, and they're paying borrowers to take them, Gumbinger says.
The spreads between fixed-rate and variable loans is relatively high, with adjustable mortgages at 4.07 percent, compared with that 30-year 5.28 percent fixed rate. Think about how long you're going to stay in your house and use one of the ubiquitous online calculators that allow you to compare different loans. There's one at www.mortgages-loans-calculators.com that makes it look like you're better off with the variable now, no matter how long you stay.
• Shorten the maturity. Another dip in rates lets you squeeze a 30-year loan into 15 years. The opposite argument could be made: With rates near historic lows, there's no reason not to stretch out an obligation. But reasons like kids going to college, a planned retirement, or just wanting to burn the mortgage early can trump the bottom-line logic of borrowing as long as possible when rates are cheap.
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