How far should you go to get a great mortgage rate?

Posted by  on Oct 21, 2012

As mortgage rates continue to hit record lows, people who are in a position to buy now are probably already taking action. But what about people who are just shy of being ready to buy a house? Are today's mortgage rates so low that they should push their timetable a little bit?

Sometimes, an extraordinary opportunity calls for extraordinary action. For example, compared to mortgage rates at just 1 percent higher, today's mortgage rates could save you over $40,000 in interest on a $200,000 home with a 30-year mortgage. So if there is anything you can do to get into the housing market a little early, it may be worth it -- if you don't overreach. The following are some dos and don'ts for acting on today's mortgage rates.

Three dos:

  1. Redirect some savings. Normally, having some emergency funds is a good idea; but if redirecting these toward a down payment gets you into the housing market a little earlier, it may pay off in the long run. Just be sure you use the mortgage savings to start rebuilding those emergency funds.
  2. Downsize your dreams. Instead of holding out for your dream house, could you live with something a little less grand? After all, if mortgage rates rise, your dream house might be out of range in a year or two anyway.
  3. Go into emergency savings mode. Tighten the household budget as if you were in emergency mode. If six months of sacrifice helps you capture a low interest rate, you'll be able to live better over the long run.

Three don'ts:

  1. Withdraw from a qualified retirement plan. Today's mortgage rates are great, but still not worth the 10 percent tax penalty.
  2. Overreach on the assumption you'll be better able to afford the mortgage in the future. The job market is weak and pay raises have been meager. Don't take on a mortgage if it's a stretch to keep up with payments.
  3. Gamble on an adjustable or balloon-rate mortgage. If it takes some sort of gimmick to make the initial payments affordable, you are putting yourself in a position to get burned when higher payments kick in.

In short, today's mortgage rates represent an extraordinary opportunity to save money -- so long as you do it the right way.


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