Mortgage Rate Fluctuations

Posted by  on May 19, 2010
If you want to buy a house, you should be familiar with what mortgage rates are doing. Since mid-2004, the Federal Reserve has raised interest rates several times and is expected to keep raising rates in the near future. This means that if you have an adjustable mortgage rate, it may adjust to a rate that is higher than a fixed-rate mortgage. Now might be a good time to consider refinancing to a fixed-rate loan.

However, you must also consider the amount of time you plan to be in your home. If you are only going to be in your home for a few more years, it may make sense not to refinance out of your ARM. If you are going to be in your home longer than seven years, it might be a smart move to refinance to a fixed-rate mortgage.

Remember that unlike your mortgage, the interest you pay on a credit card is not tax-deductible and you pay a higher rate than you would on your mortgage. Because of this, credit card debt is usually referred to as bad debt whereas your mortgage is considered good debt. Using your home equity to pay off your high-interest credit card debt can save you money in the end. Using your home equity, rather than your credit cards, to finance expensive purchases can also be a smart move. Be sure to consult your tax adviser.

Deciding on when to refinance your mortgage will depend on the circumstances of your situation: how long you will be in the home, what your financial goals are, whether interest rates are dropping, etc. It is up to you to decide if it is right for you.

A drop of just one-half to three quarters of a percentage point in interest can lower your monthly payment. If you do not refinance, you may be paying too much every month for your loan, and that is never a good financial move. There are a few different ways you can lower your monthly mortgage payment.

First, you can simply refinance to a lower interest rate. A lower rate generally means a lower monthly payment. In addition, you can change the term of your mortgage. For instance, if you have a fifteen-year mortgage, you can lengthen the term to thirty years. Since the balance of your mortgage is spread out over a longer period, your payment is lower. However, if you have a 30-year mortgage and one of your financial goals is long-term savings, you may want to consider shortening your term to 20 or even 15 years. Your payment will be higher, but you will pay much less in interest over the life of the loan, saving you thousands of dollars in the end.

The third way to lower your payment is to refinance to an interest-only loan. With an interest-only loan, the minimum amount you are required to pay is the amount of interest for a certain period, though you can pay as much principal as you like. However, you get the flexibility to pay less if you need or want to divert your money elsewhere.

The equity you have in your home can act like a savings account that you could access through a home equity loan or a cash-out refinance. This is done when you want to finance an important home improvement, pay for college or pay off high-interest credit card debt. Whatever your reason, this may be the right option for you.

Again, you need to consider how long you plan to be in your home. Many people move within nine years so it may not make sense to pay a higher interest rate for a 30-year fixed-rate mortgage when you are not going to be in the home that long. Doing so may be costing you money.


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