It’s true that mortgage rates are at a historic low right now – so low that you might be inundated with junk mail, spam and calls from churn-and-burn mortgage companies. In fact, today’s rates are not so far from the all-time low for the benchmark 30-year rate. which was 3.5 percent in December of 2012. With rates slipping over the past few months, affordability for purchasing is increasing.
For example, a 1 percentage point difference (4.5 to 3.5) on a $250,000 mortgage can mean $144 less per month in mortgage interest.
While this is great news, sound financial planning avoids knee-jerk reactions to rate fluctuations. Instead, it’s better to take the long view, and do a thorough analysis of the best way to leverage current conditions.
The bottom line is that great rates alone should never drive a new mortgage or refinance application. The benefits are case-by-case, depending on your unique circumstances. That’s where guided, mathematical analysis comes in.
Three Scenarios in the Great Rate Debate
• Increased affordability is great news for first-time homebuyers who are ready to say goodbye to renting and for those ready to move up to their dream homes.
• Saving up for a conventional downpayment may not make sense given the rate of housing increases, which would offset the advantage of the lower rate.
• Existing homeowners who are tempted to refinance need to first determine their break-even point, the length of time they plan to stay in the home, and all their other financial variables.
Case 1: Ready to Move
If you’re ready to pull the trigger, consider yourself lucky that you’re doing so at a great time to enter a mortgage, rate-wise. Over the long term, you’ll save tens-of-thousands of dollars by locking in at a great low rate. Our S.M.A.R.T. mortgage specialists will guide you through the best mortgage structure to realize your goals for financial security and find the product that best fits your circumstances.
Case 2: Thinking About New Purchase
If you’re just now thinking about purchasing a new home and are motivated by the low rates, here are a few of the considerations our S.M.A.R.T. mortgage specialists will guide you through:
– First-time homeowners should evaluate whether waiting to save up a bigger downpayment makes sense or not. For example, paying PMI (mortgage insurance) might be cheaper than waiting when home values are appreciating at 5% or more each year. The extra affordability of the low rates can be eroded quickly by increasing home values.
– Purchasers who already own a home should evaluate the best use of their sale proceeds. While it’s traditional to use proceeds as the downpayment on a new home, the proceeds might work harder elsewhere when mortgage rates are so low, handily off-setting the cost of PMI. For example, using proceeds to pay down revolving debt could make more sense and keep more money in your pocket at the end of the day.
Case 3: Leveraging Home Equity
For those who have a considerable amount of home equity, the first step in considering a refinance is to determine your break-even point. Once you know how long it will take to “pay back” the refi cost, then you can balance that against your imminent life circumstances. For example, if you might relocate for work in a year and your “break even” point is 16 months, then it wouldn’t necessarily make sense. Another consideration is your financial goals. For example, if you’d like to generate recurring revenue through an investment property, low rates make it an attractive time to do so.
Whatever your scenario, talk to a S.M.A.R.T. mortgage specialist to analyze your circumstances and map the best course for your financial security.