The mortgage industry has gone through some changes in the last three months. If you are looking to finance a home in 2017, it is important that you know what the opportunities are and how to capitalize on them. Over the next 12 months, keep these items in mind as you consider your financing arrangements:
Interest rates have spiked and are now sitting at over 4% on the widely popular 30 year fixed-rate mortgages. This change occurred seemingly overnight once Donald Trump became the new president-elect. The markets saw this and rallied on the news, marking a change that meant less regulation with more opportunity in the investment market. Subsequently this meant that the expense bonds were driving mortgage rates higher. The market was further effected when the Federal Reserve tightened its monetary policy in December 2016. As a result, you can now expect an interest rate anywhere between 4% and the mid 4’s depending on your credit score, the loan program selected and your financial stability.
Buying a home is still a solid goal for many as it is certainly still an attainable one. With higher interest rates, however, affordability becomes the main choice to consider between being able to make a mortgage payment and continuing to save. When you qualifying for a loan, an interest rate with a half percent difference can translate to around a $75-$80 per month difference depending on the amount financed into the loan. While this change may not seem significant, in the bigger picture it is something to take in to consideration when planning to invest in a high ticket purchase. Keeping your credit score as high as possible is also important when scoring a good interest rate and keeping your housing payment manageable.
The option to refinance in order to lower your interest rate might not be the best investment for the moment. Rates are not where they were prior to the election so going from a 30 year mortgage to a new 30 year mortgage and expecting a lower interest rate may not be in the cards for a little while. Here are some refinance opportunities that are more accessible in today’s environment:
- Cash-out refinancing – Refinancing with the intent to pull equity out of your home is a byproduct of a higher rate inflationary environment. Remember, when mortgage rates rise it is also common for interest rates on consumer obligations such as lines of credit, student loans, and credit cards to rise as well. Cash-out refinancing can be a smart and prudent move to rid yourself from high rate/high payments that are typically associated with consumer debts. For example, if you can pull out $20,000 in a cash-out refinance and use that money to pay off your larger outstanding debts (i.e. car loan, student loan, credit cards, furniture), your mortgage payment rises $100 per month but you save $600 per month in obligatory debt You can then take that extra $500 and save that money or pay down your mortgage principle.
- Shortening your loan term – Long-term fixed-rate loans are expensive when you consider the total interest paid over the life of the loan. Going from safe 30 year fixed-rate mortgage to a 15 year fixed-rate mortgage can save you a substantial amount of money. 15 year and 10 year fixed rate mortgages are both hovering in the mid-to low 3% interest margins, earmarking an opportunity to pay your mortgage off in full while also perhaps planning for retirement.
- Refinancing to drop mortgage insurance – this form or refinance might mean having to pay a slightly higher interest rate on long-term 30 year mortgage, but also means dropping the private mortgage insurance that brings up your payments several hundred dollars per month. The key is to take the money and do something smart with your new savings.
What is in store for mortgages this year?
Things to pay attention to:
- Financial Markets – If the stock market continues to improve and rally, expect mortgage rates to continue their upward climb.
- Big Events – It would take something big and unexpected to cause the market to reverse course, shifting money into bonds and driving mortgage rates lower. If something like this does happen and you are eyeing a particular interest rate, act quickly.
- Fannie Mae and Freddie Mac – Pay attention to any news the comes from Fannie Mae or Freddie Mac. If rates continue to rise, current underwriting standards might be adjusted to meet the needs of the shrinking housing market. Expect guidelines to loosen slightly to offset the higher interest rates.
If you are looking to purchase a house, or refinance one you already own and there is a financial benefit to the terms and rate you qualify for, act on it. Let affordability be the driver of your decision to purchase or refinance a home to meet your financial goals. The market will always be changing and evolving and if you can justify the opportunity, it should be something for you to seriously consider.
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