Mortgage interest rates are on the rise and projected to climb higher as the year progresses. Lawrence Yun, chief economist for the National Association of Realtors, forecasts the 30-year fixed-rate to hit 3.7 percent by the end of the year. Michael Fratantoni, chief economist for the Mortgage Bankers Association, is a bit more pessimistic and thinks rates could reach 4 percent before 2023 rolls around. So, what can homebuyers and homeowners who refinance do to offset the higher rates? Seven possibilities come to mind.
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- Improve your credit score. According to the myFico loan cost calculator available to consumers at http://www.myfico.com/credit-education/calculators/loan-savings-calculator/, the interest rate on a $200,000 mortgage obtained in New Mexico on Jan. 25 ranged between 3.19 percent for borrowers whose scores were at least 760 to 3.779 percent those whose scores were below 640.
- Make a larger down payment. Increasing the down payment lowers the amount borrowed and the monthly payment. Borrowing $195,000 instead of $200,000 at 3.5 percent will lower the monthly payment by $22.00 and save $8,084 in interest over the life of the loan.
- Buy down the rate. Paying discount points will lower the interest rate for the life of the loan. Points are one-time fees paid up front. A point is equal to one percent of the loan amount and would be $2,000 on a $200,000 loan. In exchange, the rate will be reduced by anywhere between one-eighth to one-quarter percent for each point paid.
- Shop around. I’ve always maintained that lenders are like shoe stores — they’re both retailers. One sells shoes and the other sells money. Just as not all shoe stores carry the same shoes, not all lenders carry the same loans. And, even if two shoe stores do carry the same products, they may not price them the same.
- Lock your interest rate. Locking the rate early in the transaction assures that the rate won’t rise during the loan process. Many lenders will lock a rate for 30-45 days at no charge and will charge roughly two basis points per day to extend the lock beyond the initial period. A basis point is one-hundredth of one percent. Using that formula, extending a lock for an additional 30-days would cost the borrower roughly six-tenths of one percent of the loan amount.
- Reduce your loan term. Typically, mortgage rates for 15-year loans are lower than the rates for 20- or 30-year loans. According to Freddie Mac on Jan. 20, the 15-year rate was approximately three-quarters of a percent less than the 30-year rate.
- Refinance your loan. Refinancing a loan for a one-percent difference in the rate is a rough rule of thumb, with a two-percent difference being a no-brainer. Adjustable-rate mortgages will begin to move upward this year so now may be the time to refinance into a fixed-rate product. Refinancing either type of loan may not be a good idea, however, depending on how long you intend to keep your current mortgage. Paying off your new mortgage before enough time has passed to recoup the cost of obtaining the mortgage would certainly not be worth the effort.
According to Freddie Mac’s Weekly Primary Mortgage Market Survey published on Jan. 20, the rate for 30-year fixed mortgage was 3.56 percent, while its 15-year sibling was priced at 2.79 percent. While some borrowers may be shocked when confronted by mortgage rates approaching 4.0 percent, they can consider themselves far more fortunate than the borrowers who paid 18.45 percent for their mortgages in October of 1981.
See you at closing.
Gary Sandler is a full-time Realtor and owner of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.