Mortgage rates won't go much lower,so don't Wait

Andrew Leckey

September 10, 1993|By Andrew Leckey VTC | Andrew Leckey VTC,Tribune Media Services

"Enough, already, of talking about that blasted low-rate mortgage you got back in 1993. We're sick of hearing about it."

Decades from now, that may be the message your children or grandchildren will be communicating to you in an annoyed tone of voice.

That is, if you snare a mortgage that's below 7 percent this fall. The best mortgage rates in 25 years should provide you with plenty of future bragging rights if you take advantage of them.

In fact, many homeowners in the future may feel tied to their dwellings because they won't be able to find mortgage deals that equal their existing loans.

The refinancing boom of last March has been reignited by the latest rate dip. One out of five U.S. homeowners refinanced either late last year or this year. For many lenders, refinancings now make up more than half of all mortgage activity.

With rates this low, the old rule of thumb that mortgages need to drop 2 percent to make refinancing worthwhile no longer holds water. Some studies have shown that, if you can lower your interest rate by 1 percent, the refinancing will put you ahead after just 18 months.

A dollar's a dollar, and even if you save only $10 to $15 a month, refinancing can make sense if you intend to stay in your home a long time. It can also make sense even if you've previously refinanced and are coming back for more.

It's important to realize that how long you stay in your home makes a big difference. There's no sense refinancing if you intend to sell in a year or two. Carefully figure out how long it will take you to recoup your expenses, dividing the total costs by your monthly savings.

In the case of a $100,000 mortgage, a typical change from 9 to 7 percent can make a big difference. The 9 percent loan carries an $805 monthly payment, while the 7 percent payment is $665. That's a savings of $140 a month by refinancing.

Over the life of that loan, the savings will be more than $50,000 by refinancing.

If you decide that refinancing is for you, visit three or four lenders and find out all of their terms and fees before deciding what's best for you.

Although terms vary, the typical cost of refinancing is $1,000 for title, appraisal and credit check. Look for a lender that will give you a preapproved loan application and let you lock in a rate at application for 60 days at no charge.

Also important is a streamlined application procedure that will accept W-2 forms and payroll stubs as proof of wages.

Adjustable-rate mortgages, with rates as low as 4.5 percent, make sense if you don't expect to be a long-term owner, since you're accepting the risk that rates could rise. Otherwise, fixed rates at these low levels make more sense.

The debate between 15-year and 30-year mortgages rages on, with no right answer.

It may make sense to move to a 15-year loan, which pays off your mortgage in half the time, if you can wind up with a payment similar to your current 30-year payment. After all, it would be terrific to face retirement without a mortgage payment. On the other hand, you could probably do just as well in the long run with a 30-year mortgage that costs less each month, if you invested the difference during the course of the loan. The call is yours.

Should you wait for interest rates to go even lower? Probably not.

Sluggish economic growth and low inflation indicate that mortgage rates could slip a bit lower, perhaps one-quarter of a percent, by year's end. We're talking a fraction here. There will likely be no continued significant decline and there's always the chance rates could increase slightly. The government itself has a hard time predicting rates.

So don't hesitate much longer and wind up seeing the low rate you could have gotten ratchet a bit higher before your very eyes.

If you do decide to refinance, realize that the glut of refinancings can lead to errors or neglect in necessary paperwork. So it's a good idea to call your title insurer and ask if there are any uncleared liens on your property after refinancing is completed. Some homeowners have found that their title isn't clear, and this can cause longer-term credit problems that affect future transactions.

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