For those of us old enough to remember the previous century, the recent financial headlines have highlighted interest rates which seemed impossible before the past 10 years. We have seen historic lows on several benchmark interest rates, and a surprise rate cut by the Federal Reserve.
To put the term “historical” in some personal perspective, recent 30-year fixed rates are in the low 3% range. Compare that to the rate on your first mortgage; it sounds more like a good CD rate to me.
This news has caused many homeowners and potential homeowners to wonder how they might be able to take advantage of the current interest rate environment. While every individual circumstance is unique, we can look at a few general mortgage strategies and a few pitfalls.
If you already own a home and you have no immediate plans to move, the most common way to benefit would be to complete a simple rate and term refinance of your current mortgage into a lower rate.
If you are considering this option, be aware of all the fees involved and make sure the monthly savings are being driven by the lower rate rather than resetting the loan term back to 30 years.
This is also a good time to consider shortening the term on your current mortgage. Shorter terms, such as 15 years, generally have lower rates but have higher payments due to the reduced amortization schedule.
If you can manage the higher payment, you will realize a drastic reduction on the overall interest paid compared to a longer-term mortgage.
While you are evaluating your current mortgage, I would also encourage you to take a look at your overall personal debt. Revolving debt and installment loans generally carry significantly higher interest rates than mortgage debt.
If a homeowner does not have a specific plan to eliminate these high rate loans quickly, a debt consolidation refinance may provide a significant monthly savings. The trick with this option is to make sure that at least some of the monthly payment relief goes into savings or pays down other debt so that you do not end up back where you started.
This is also a great time for homeowners to begin financial planning for any major expenses that could be on the horizon. These could include home improvements or updates, educational expenses, or a new vehicle. If you have home equity, a cash-out refinance may enable you to finance these expenses at a very low rate.
For people considering a new home purchase, low mortgage rates alone are not enough to make a major life decision, like buying a home. However, it is a good time to explore the costs of homeownership and begin your serious planning. It could be more within your reach than you think.
Finally, for those seriously considering any real estate financing, either purchase or a refinance, make sure you visit a qualified mortgage professional.
Every situation is different, and a good mortgage loan officer will present you with several options as well as an accurate estimate of the payment and all the fees you can expect. This will enable you to make an informed decision and complete a beneficial transaction.
Ric Spiehs is vice president and chief executive officer for Coastal States Mortgage.
