Salivating over mortgage rates that seem impossibly low? Ready to run out and refinance?
Not so fast. In a rush to get a good deal, you could leave an even better one sitting on the table.
Today's mortgage rates--around 4 percent for a 30-year mortgage--can't but look tempting.
But you could do better. By converting your 30-year mortgage into a 15- or 20-year loan, you can lock in an interest rate well below 4 percent.
And if you are willing to roll the dice on an adjustable-rate mortgage (ARM), you can push your rate close to or even under 3 percent, says Leif Thomsen, chief executive of Walpole, Mass.-based Mortgage Master.
"These are crazy rates," Thomsen says.
In fact, Freddie Mac reports in a quarterly loan survey, more than 37 percent of homeowners who refinanced their mortgages during the second quarter moved from a 30-year loan to a 15- or 20-year mortgage. It is the highest number since the third quarter of 2003.
And a growing number of homeowners with adjustable-rate mortgages are choosing to stay with ARMs rather than seek safety in a fixed-rate loan.
For borrowers motivated to refinance by low fixed rates, they could obtain even lower rates by shortening their term," states Frank Nothaft, Freddie Mac vice president and chief economist.
If you are thinking of refinancing, here are your main alternatives--and some pros and cons to each.
Moving to a 20-, 15- or even 10-year loan
Back before the great real estate bust, when rates were at more normal levels and real estate values were still high, converting from a 30-year mortgage to, say, a 15-year loan would have required some soul searching. After all, while moving to a 15-year loan can dramatically hasten the day you make your last mortgage payment, getting there with a shorter-term loan has traditionally involved a grueling grind of higher monthly payments.
But that equation is shifting. By converting a 30-year mortgage down to 20, 15 or even 10 years, you are guaranteeing yourself a sizable interest rate cut. And that, in turn, could make the higher payments that come with shorter-term mortgages more manageable than ever before.
Let's plug a $250,000 loan into the ShopRate mortgage calculator. That yields a monthly payment of $1,208 at 4.1 percent. However, if you were drop that down to 15 years, the range of current mortgage rates available falls to 3.3 to 3.7 percent. That's enough to keep the monthly payments in the $1,763 to $1,812 range. "For only a slight increase in payments, [refinancers] may be able to shorten down to a 20- or 15-year term," says John Brodrick, senior vice president for mortgage banking at Boston-based Eastern Bank. "It saves tens of thousands over the course of the loan."
Sticking with the old standby
The 30-year, fixed-rate mortgage is still the safest bet. The interest rates are low, yet you don't have to deal with the inevitably higher payments that come with a shorter-term loan. And even with the rising popularity of 20- and 15-year mortgages, it is still by far the most popular option out there. Roughly 63 percent of homeowners who refinanced in the second quarter stuck with a 30-year mortgage, Freddie Mac reports. The lowest mortgage rates range from 3.8 to 4.1 percent.
Gambling, or not, on an adjustable-rate mortgage
Adjustable rate mortgages not long ago were seen as a harbinger of doom in the already battered real estate market. But the long-awaited ARM Armageddon never happened, with millions of adjustable rate mortgages resetting without fanfare at today's low rates.
Of course, by their very nature ARMs are a gamble--the rock bottom rates we are seeing now won't last forever. But ARMs can provide a short-term breather for families facing a sudden medical problem or other crisis, or those planning to leave their homes within five to seven years (and confident they'll be able to sell).
Rates for converting a $250,000 mortgage into a 5-year ARM range from 2.5 percent to 2.9 percent, or anywhere from $988 to $1,041 a month, ShopRate's mortgage rate calculator shows. "The ARM can provide you with the breathing room of a much lower payment," Mortgage Master's Thomsen notes.
By thinking term and type, not just rate, when refinancing, you could save big. It all comes down to your monthly budget and your tolerance for risk.
