A few months ago, we discussed how buying “points” can be a great way to lower your mortgage rate and save thousands annually and tens of thousands over the life of the loan. This week we’ll give you two more ways you can shave your rate down during a year in which mortgage rates are likely to increase substantially.
Mortgage Term: 10 or 15 Year
When most people think about mortgages, they picture the ever-popular 30-year fixed-rate mortgage. It’s stable, secure, and if you can lock in a low rate, you typically won’t find a better deal. That said, if you are concerned about your rate, it is worth your while to consider an alternative to a 30-year mortgage.
A 10- or 15-year mortgage, while more expensive on a monthly basis, would significantly decrease your interest rate and allow you to pay more principal in each payment. Shortening the term of your loan could lower your interest rate by 0.75% or more! Over the life of the loan, this would save you hundreds of thousands, and you’d be building up equity much faster.
Adjustable-Rate Mortgage: 3, 5, or 7 years
Another way that you can avoid a higher interest rate – remember, the Federal Reserve is expected to increase the Federal Funds target rate at least two more times this year – is by exploring an adjustable-rate mortgage, or an ARM. While this loan product got an (in some cases, deservingly so) bad reputation during the housing boom of the 2000s and the subsequent economic and foreclosure crisis, it is a great option for the right borrower in the right circumstance. For instance, if you don’t plan to stay in the home for more than 5-7 years, or have an income level that will allow you to pay it down faster than the scheduled amortization, it is worth considering. Common ARM programs include an initial period (3, 5, or 7 years) during which the interest rate is substantially lower (could be as much as roughly 0.5%) than a typical 30-year mortgage rate. But there’s a catch – once the ARM “resets,” you’ll lose the great, low, locked-in rate you enjoyed during the initial period and will pay the prime rate PLUS the federal funds target rate. That means you’ll be paying a higher interest rate, and it will not be locked in, and will instead be subject to the ups-and-downs of the market.
Getting a great deal on your interest rate is worth the effort, but it is crucial that you do your homework! Talk to multiple lenders, shop around for the best rate and terms, and wait until you know how much you can borrow before you go house hunting.