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How to Take Advantage of Lower Mortgage and Other Interest Rates
Should You Refinance When Rates Are Low?
If mortgage interest rates are low, should you take advantage of the lower rates
to refinance your mortgage? Take out a home equity loan? Buy a new car? Transfer
your savings into a CD? Search for a new credit card deal? What do the lower
interest rates mean to you? This article discusses mortgage moves you should
consider during periods of low mortgage interest rates.
Fixed Rate Mortgages
The reduction in interest rates by the Federal Reserve doesn't necessarily
result in drastically lower rates for fixed-rate mortgages. This is because bond
rates, not the fed rate, drive fixed mortgage rates.
You've probably heard that it only makes sense to refinance your mortgage if the
new interest rate is at least two percentage points lower than your current
rate. Forget this piece of advice. It worked in the days when you could only get
a 30-year fixed rate mortgage. It doesn't apply in today's financial markets
where there are many options for financing your home, including fixed mortgages
with terms of 15, 20, or 30 years; five- and seven-year balloon loans; and a
wide variety of Adjustable Rate Mortgages (ARMs).
Even if you can't lower your monthly payment by refinancing, it might make sense
if you can give up the insecurity of an ARM for a fixed rate. Marshall Loeb of
CBSMarketWatch.com offers guidelines for helping you decide whether to
refinance, in his book "52 Weeks to Financial Fitness." You can read his chapter
on Mortgages at CBSMarketWatch.com.
Adjustable Rate Mortgages (ARMs)
Adjustable mortgage rates are affected more by changes in the fed rate because
these types of loans follow short-term interest rates, such as Treasury bill
rates, which follow the fed rate.
When does an ARM make sense? If you're planning to stay in a home for only a few
years and you can get an ARM for significantly less than a fixed rate mortgage,
you may come out ahead by going for the ARM. Adjustable rate mortgages are also
popular with people who may have difficulty qualifying for a loan at higher
fixed interest rates. The lower ARM rate lowers their monthly payment, making it
easier for them to qualify for the loan.
If, on the other hand, you already have an ARM and you plan to stay in your
house for the long-term, consider locking in at today's attractive fixed
mortgage rates.
Home Equity Loans
Home equity loan rates follow the prime rate, so they are directly affected by
the Fed's interest rate increases and decreases, although they are always higher
than regular mortgage rates.
When interest rates are low, it's an excellent time to take out a home equity
loan (but not necessarily a home equity line of credit, which works differently,
and only if you use it wisely).
Making the Decision to Refinance
If you decide to refinance, first contact your current lender to see if you can
negotiate with them to waive some of the closing costs. If this doesn't work,
you can call local lenders for rate information, but the best way to search for
and compare mortgages is to do so online at one of the many web sites that offer
this service, such as e-loan, quickenloans.com, or bankrate.com, to name just a
few. Many online brokerages will also allow you to apply for the loan online.
If rates are low and you're in the market for a lower mortgage rate, don't
hesitate to investigate whether you can save money by refinancing.
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