Many home buyers assume that waiting until mortgage rates decrease will save money – but is that truly worthwhile?
Though rates won’t return to their earlier levels of 3% or less, homebuyers still may find ways to secure lower interest rates.
Shorten Your Loan Term
Shorter loan terms allow borrowers to accelerate the pace at which equity builds by paying a higher portion of their monthly payment towards principal. This can make it easier to sell or access their equity for future goals. Furthermore, shorter loan terms reduce interest accrual period, saving borrowers thousands or even tens of thousands in interest payments over time.
One major drawback of shorter term loans is that they require more of your monthly budget, which may present difficulty to homeowners juggling multiple financial responsibilities at the same time.
Consultation with a mortgage professional when seeking to secure a shorter loan term is vitally important, as this assessment process involves reviewing your current financial status, goals and risk tolerance.
Refinance
Refinancing is the practice of replacing your mortgage loan with one with different terms, such as reduced interest rate or loan period length. Refinancing can help unlock home equity for debt consolidation or home improvements – just make sure that it suits your financial goals first!
Refinancing can take months or years to break even, making them impractical if you plan to sell within several years. Also, selling before recovering all closing costs could result in prepayment penalties.
As a general guideline, refinancing is worth investigating when the new rate is at least one percentage point lower than your existing interest rate. Lower rates could save thousands in total interest paid over the life of your loan; ultimately, this decision lies with you alone to decide if those savings outweigh upfront fees or an extended loan term.
Reduce Your Down Payment
Assuming your down payment is adequate, the lower the loan-to-value (LTV) ratio and less risky it appears to lenders. This is because lenders will finance less of your home’s total purchase price upfront; and may need less financing over the life of the mortgage agreement.
However, if you cannot save enough for a substantial down payment in time to buy now, it might make more sense to wait. Mortgage rates fluctuate and it takes time to save up enough money for one.
As conventional mortgage lenders typically require down payments of at least 20% for conventional mortgage loans, any payments below that threshold usually require PMI – increasing monthly payments by hundreds of dollars each month. For more on down payments and how to save for them, watch this CNBC Select video.
Buy Points
Mortgage points are a one-time fee that you can pay to reduce the interest rate on your loan and save thousands over its lifespan. They may be worthwhile investment if you intend on staying in the home for several years.
But before purchasing points, it is essential to do your homework and calculate if buying them makes financial sense. Determine when your savings from lower interest rates surpass the upfront cost associated with purchasing mortgage points.
Keep in mind that improving your credit and saving for a down payment are also effective methods for securing a lower mortgage rate without needing to purchase mortgage points. So make sure to explore all possible avenues when starting the process of buying your next home. For more information about mortgage rates, types of loans available and home financing information visit Select’s resources.