Mortgage rates likely to remain low
By Jeff Brown
Knight Ridder News Service
Happily, I threw in the towel a month ago and vowed to stop saying things like "mortgage rates cannot go lower."
They can — and have.
The Mortgage Bankers Association of America said the standard 30-year, fixed-rate mortgage fell last week to a new record low of 4.99 percent, down from 5.27 percent a month earlier.
The survey firm Bankrate.com put Tuesday's average at 4.88 percent. A quick look on the site, www.bankrate.com, found plenty of lenders offering 4.75 percent.
If you're thinking of refinancing or buying a new home, should you rush to lock in one of these deals?
Frankly, there may not be any hurry. The mortgage market is reacting to signals that the Federal Reserve intends to keep interest rates low. Many experts think the Fed will cut short-term rates yet again next week, driving mortgage rates down even more.
It would be a shame if holding out for an even lower rate caused you to miss today's great mortgage deals.
I've said it before: Focus on the monthly payments, not the interest rate. At 4.75 percent, the monthly payment on every $1,000 borrowed on a 30-year loan is $5.22. Cut the rate to 4.5 percent and that falls to $5.07 — a savings of $30 a month on a $200,000 loan.
Mortgage shoppers have a number of issues to consider. Here's a quick rundown on how they look at today's rates.
Which loan — 30-year, 15-year or ARM? Forget the adjustable-rate mortgage. Sure, you might pay as little as 3 percent the first year, but annual adjustments could eventually lift the rate as high as 9 percent. It's better to lock in a low fixed rate.
With a loan for 15 years instead of 30, you can reduce your rate by about a half percentage point — to 4.25 percent with many lenders — and you'd pay the mortgage off in half the time, saving a bundle in interest charges. But monthly payments will be higher, since the debt has to be paid off twice as fast.
For every $1,000 borrowed, the monthly payment on a 15-year loan at 4.25 percent is $7.52, vs. $5.22 on a 30-year loan at 4.75 percent.
To isolate the effect of that half-point in rate savings, assume a 15-year period for both loans. The rate reduction saves about 26 cents a month for every $1,000 borrowed — $52 a month on a $200,000 loan.
That's not a huge savings. The biggest benefit of a 15-year loan comes from paying the loan off faster, not from the lower rate.
So if the higher payment makes you uncomfortable, get a 30-year loan with a lower monthly payment and make extra principal payments to retire the loan early. That way, you get the big savings from shortening the term of the loan, but can skip the extra principal payment whenever money is tight.
Run the numbers yourself with the online payment calculators offered by the Butler, N.J., rate-tracking firm HSH Associates at www.hsh.com.
Refinancing: Deciding whether to stick with an older mortgage or jump to a new one is simple arithmetic. Compare the monthly payments of the two loans. Refinancing will pay off if you will have the new mortgage long enough for its lower monthly payments to make up for the refinancing charges.
Remember, though, that if you have only five years left on the old mortgage, a new 30-year loan would burden you with 25 extra years of interest payments. To avoid that, use a shorter term on the new loan, or plan to make extra principal payments to pay the new loan off early.
Points: Each point equals 1 percent of the loan amount. By paying these up-front interest charges, you can get a lower rate and lower monthly payment. If you'll have the loan long enough for the lower payment to more than make up for the cost of the points, paying points makes sense.
