Considering buying a home, refinancing your mortgage, or applying for a home equity loan? Watch federal interest rates closely, as shifting rates could make a significant difference in your home loan options. Interest rates affect the type of mortgage you choose and dictate when it's wise to make a change
What type of mortgage rate is best?
When interest rates are rising, a fixed-rate mortgage is usually an ideal choice, since it locks in the current rate and protects you from future rate hikes. When rates are falling, an adjustable-rate mortgage (ARM) becomes more attractive, as its interest rate changes periodically (usually every one, three, or five years), allowing you to benefit from lower rates.
Some people choose an ARM even when rates are rising because the initial interest rate on an ARM can be substantially lower - as much as two percentage points lower than that of a 30-year fixed-rate mortgage. This means you'll pay less until mortgage rates have increased a full two percentage points. After that, you'll pay more than a fixed rate.
There are also hybrid ARMs, which have a fixed rate for a certain time period, typically 3 - 10 years, and then become adjustable. For example, a 5/1 ARM has a fixed rate for five years, after which the interest rate adjusts annually. Hybrid ARMs can be the right choice if you're planning to move within a few years or if rates are likely to rise in the short-term but then flatten or fall. However, these long-term trends can be difficult to predict.
Does refinancing make sense?
A change in the interest rate trend can make it worthwhile to switch to a different type of mortgage. When rates are falling, you can save money by moving from a fixed-rate to an adjustable-rate mortgage, so you can benefit from the lower rates. If interest rates appear set for a sustained rise, switching from an ARM to a fixed-rate mortgage can lock in a lower rate and protect you from higher payments. You can even use cash-out refinancing to borrow enough to pay off credit card debt accruing at a higher interest rate. Just make sure that any closing costs related to refinancing don't offset its benefits.
Should I switch to a fixed rate?
Some ARMs allow you to convert to a fixed-rate mortgage when interest rates threaten to rise significantly. This is a useful option, since it protects you from drastically higher payments with less paperwork and expense than conventional refinancing.
Should I switch to a fixed rate?
If interest rates are rising when you're negotiating your mortgage, it can pay to "lock in" the promised rate and points while the mortgage is being processed. This ensures you get the interest rate you've been quoted, even if the going rate is higher by the time you close. There may be a fee for this guarantee.
Taking advantage of changing rates requires you to act quickly. Mortgage rates can rise and fall abruptly - as much as a full percentage point in a couple of months. Track these moves in the financial section of your newspaper, and be ready to make the choice that makes sense for you.
Article Source: http://www.homeloancenter.com/Articles/Mortgage-Advice/Intrest-Rates-Affect-Mortgage.aspx
