Ways to Manage Mortgage Rates

Even though there is a lot that you cannot control about mortgage rates, you can choose how you handle the changing rates and what kind of mortgage you will use to your advantage.

It is a well known fact that mortgage rates waver. Like the weather, they will always keep you guessing. Although you cannot do anything about the randomness of the rates, you can educate yourself in order to respond to the changing rates in ways that benefit your financial needs.

One strategy that many homeowners use is to pay more up front! If you have an adjustable rate mortgage that is susceptible to higher interest rates in the future, perhaps you should pre-pay in the beginning to bring down the later payments. All you have to do is pay a little more each month for the first few years and you will thank yourself in a decade!

Remember that there are all kinds of loan products with numerous different features and options. You can do a fixed rate mortgage and rely on paying the same amount for the entire duration of the loan, or you can get a “hybrid” ARM (adjustable rate mortgage), which means you have a fixed rate for a few years and then you begin paying the rate that coincides with the market. Be aware, though, that the longer the fixed rate the less the interest savings.

Many people find buydowns alluring. It is kind of like a sign in the supermarket that tells you that you can get four boxes of pasta for a special price, or if you buy two you get half off of the second. These kinds of advertisements make you think that you found such a deal and are saving so much, when in reality you are spending much more than you would have on products that you may not even want. With buydowns, there is a similar effect. You start with a lower interest rate and slowly it creeps up higher. What people need to realize is that you are starting low to end high. You will be paying more than the market rate in the end since you are paying less than the average rate in the beginning.

You do have the option of paying points to lower your interest rate. This can be costly, as one point costs 1 percent of the loan, but each point will lower your interest rate around 1/8 percent.

A commitment period is the time it takes a loan to close. Like when someone puts an offer on a house and both parties must wait until everything goes through and the contract is official, the same holds true with a mortgage purchase. The average commitment period is 45 days, but it can range from 30 to 60. If you have good credit and are well prepared and organized when applying for the loan, you are likely to close sooner and save money!

Don’t forget that the more you put for a down payment, the less you have to pay in monthly fees along the way and the less you will have to worry about rising interest rates!
Mortgage Market Trends

Finding a perfect mortgage is like finding a perfect life mate: No matter how long you search or wait for the right mortgage quote, there is a good chance that there will be a better rate and a worse rate in the future. The fact is that mortgage rates have always been erratic, and while some causes of the change in rates is known, there is no way to predict tomorrow’s rates with very much certainty. Still, looking at graphs of historical trends and analyzing some patterns in the past can help give you a better idea of possible mortgage trends in the future. Like with anything, what goes up must come down (and vice versa). The hard part is hypothesizing how quickly rates will start to reverse again, and by how much.

One measure of mortgage market trends is the Fannie Mae Primary Mortgage Market Survey, given to 125 mortgage lenders across the country on a weekly basis. This is considered one of the most valid and reliable sources for mortgage trends. The survey tracks 30 and 15-year fixed rate mortgages and one-year adjustable rate mortgages. The results only apply to traditional financing on mortgages calculated by loan to value percent or less, and do not include any discount points or other fees that would vary or alter the results.

According to the FMMS, mortgage rates in the last decade were highest around the end of 1994 and early 1995. At this time, interest was around nine percent for 30-year and 15-year fixed rate mortgages, and one-year adjustable rate mortgages were just under seven percent. Rates were high in early ’92 when they decreased until February of ’94 when they started creeping up again. After the peak in late ‘94/early ’95, rates bottomed out again around 5.25 percent for one-year adjustable and 6.5 and seven for 15-year and 30-year fixed rates in February of 1996. Up and down slightly in 1997, and then slightly decreasing at a steady rate until mid ’99, rates shot up again in mid 2000 to around 8.5 for both 15-year and 30-year fixed rate mortgages and a little over seven percent for one-year adjustables. For the most part, rates have been steadily declining since 2000, with a slight increase for a short time in 2002.